Despite headlines to the contrary, Canada’s housing market is in the early stages of a slump, claims a new report from the Real Estate Investment Network (REIN).
Headline after headline have taken note of rising property values and, in some cases, sales records, but REIN’s study of the housing market’s economic fundamentals, COVID-19 Special Edition: Real Estate Cycle Update, tells a different story.
“The housing market is driven by the rental market, which is driven by economic health like GDP, jobs, and population, and the pandemic has resulted in a tremendous decrease in GDP, job losses, and population has been put on hold with closed borders,” Jennifer Hunt, REIN’s vice president of research, told CREW.
“We’ve just had them as a trifecta, and in a normal cycle it would take 18-24 months for a housing market to catch up to GDP. At the beginning of a slump, some key components are that rent decreases while vacancies increase.”
That has indeed occurred in Toronto’s and Vancouver’s condo submarkets, and REIN’s formula, which concluded that the national housing market’s on a declivity, shows why: stunted GDP growth leads to rising unemployment, which repels immigrants and results in lower rental demand. The subsequent increase in vacancies and decrease in rents, in turn, oversupplies the market with housing, and that hurts property prices.
But why have property prices been rising through most of the COVID-19 pandemic?
“It’s partially smoke and mirrors because the pandemic froze the spring market, and that pent up demand got shifted to now and has driven interest in buying,” said Hunt, adding that remote workers also looked to upgrade their homes.
The REIN report noted that Toronto is in the early stages of a slump and advises against fix and flips, but indicated that buy and holds are at least “possible.”
“In Toronto, be cautious with buy and holds,” said Hunt. “I primarily invest in multifamily. Real estate is typically considered a very stable asset during turbulent times, and when one digs into the asset type that’s positioned to best manoeuvre through turbulent times, it’s multifamily. Institutional investors, for example, have 0% recommendation to sell multifamily assets. Their recommendation is to buy.”
Hunt added that downtown Toronto’s condo market is further along in the slump phase than the city’s aggregated housing market.
Claude Boiron, a real estate broker, author, university instructor and founder of Boiron Group, expects difficult short- and medium-terms, but believes in the resilience of the Toronto real estate market.
“I suspect things will get a little worse over the next six to nine months, but Toronto is such a strong economic engine,” he said. “We’re in a for a little bit more loss of value in downtown condos, specifically, but the return of immigration and postsecondary students will have a massive impact.”
Boiron added that freehold homes within Toronto city limits priced between $1-2 million wouldn’t be adversely affected because they garner multiple offers.
According to the REIN report, Ottawa was in a boom phase this past summer and is now emerging in the slump phase, but the city is largely insulated because it’s home to the federal government and its economy, which includes a robust tech sector, is strong.
Calgary is in the throes of turmoil, with oil prices softening during the pandemic’s inception, but there are glimmers of hope now that the city is working to diversify its economy. The report noted that the opportunity for investors to buy and hold is “good.”
“Calgary is in a slow recovery and on its way out of a long-term slump after a long decrease in GDP, and that makes it quite challenging, but it’s been working on economic diversification, which is awesome, and I’m confident in the Calgary market in the long haul for sure,” said Hunt. “But Alberta has been particularly hard hit by pandemic.”
Buy and holds are possible in Vancouver, but the report indicated that such a tactic would make more sense further into the slump.