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Impact of COVID-19 on housing markets

Impact of COVID-19 on housing markets

It’s impossible to predict how long COVID-19 will impact the economy. Still, homeowners, buyers and sellers would be wise to remember how the fundamentals of the housing market generally don’t change.”— Romana King, director of content, ZoloTORONTO, ON, CANADA, March 30, 2020

As we try to grapple with the immediate and prolonged impact of COVID-19 on the housing markets, most of us look to the data — a way of quantifying the near- and long-term effects of this devastating pandemic.

But real estate sales activity is a lagging indicator — and price adjustments can take even longer to show up.

For example, the Canadian Real Estate Association (CREA) reported exceptional sales for the month of February — with a nationwide year-over-year rise in sales of 27% led by the real estate markets that make up the Greater Toronto Area (Vancouver was a close second, with sales increasing, year-over-year, by 45.6% and 44.9%, respectively). But by late February, COVID-19 was already making an impact and by the time the World Health Organization (WHO) declared this coronavirus a pandemic, on March 11, 2020, housing markets across Canada and the continent were already starting to feel the impact.

While the COVID-19 outbreak is an unprecedented event, efforts continue to predict and mitigate the most significant effects of this pandemic. To gain a better appreciation Zolo analyzed how prior health outbreaks and financial catastrophes affected housing market numbers. Using data from the two largest markets in Canada — Greater Toronto Area and Greater Vancouver — this analysis shows how two previous pandemics and as many as four economic shocks jolted the housing market. Despite the short-term impact, the data shows that each market eventually recovered with some real estate markets achieving historical price increases.

For instance, three of the six major regions in Greater Toronto consistently experienced housing price declines when faced with a health or financial crisis. This analysis also shows that, excluding the current COVID-19 crisis, the most significant price decreases experienced by these three regions (Toronto, York, and Peel), was after the introduction of the mortgage stress test in 2018; this was closely followed by price reductions experienced during the 2008/2009 Global Recession.

The other three regions — Simcoe, Halton and Durham — also experienced price declines throughout the last 20 years, but quite often these declines were not as frequent or severe as in the other GTA regions.

Data for the Greater Vancouver Area shows how negative global health crisis, along with global and regional financial changes, can dramatically impact housing sales activity. For instance, one of the worst events to impact the GVA housing market was the August 2016 implementation of the foreign buyer’s tax, followed by the introduction of the mortgage stress test. For more the effect of health and financial catastrophes on the GTA and GVA market, please see: How will COVID-19 impact real estate (+ infographic)

The sudden slowdown of housing markets will impact each market stakeholder slightly differently. For instance, home sellers may need to adjust pricing expectations if they are in a situation where they must list their property for sale. Buyers, on the other hand, may want to sit on the sidelines for a bit until job security is confirmed (although, for those buyers with a down payment already saved and secure employment, now may be the perfect time to buy). Homeowners, on the other hand, will need to prioritize their spending. In particular, concentrate on (1) dropping monthly expenses; (2) prioritize mortgage payments; (3) continue paying your bills on time; and (4) maintain or increase your monthly earnings (if possible).

While it’s impossible to predict just how long COVID-19 will impact the economy, homeowners, buyers and sellers would be wise to remember how the fundamentals of the housing market, especially in larger regions, generally don’t change. Prior to this crisis, most housing markets were poised for growth or already showing strong sales activity. Based on historical patterns, Zolo is confident that Canada’s housing markets will eventually stabilize. Zolo will continue to monitor the impact of this pandemic. For real-time sales activity data, go online to Zolo’s market trends.

About Zolo
Zolo is one of Canada’s most popular online national real estate marketplaces. Each month, more than 9 million buyers and sellers start their real estate search using Zolo. As a tech-disruptor national brokerage, Zolo provides users with the data and resources needed to make better-informed property decisions.

Romana King
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How will COVID-19 impact real estate?

Zolo analyzed 20 years of sales data, including 5 prior catastrophes, to understand how COVID-19 will impact real estate markets. Based on this analysis, here’s what homeowners, buyers, sellers, investors and real estate professionals should expectROMANA KINGMARCH 30, 2020

From a dramatic decline in sales activity to a major decrease in earnings to a wholesale switch to virtual business, the current COVID-19 global pandemic will change Canadian real estate in the short- and long-term.

Efforts to #FlattenTheCurve — the term adopted to describe the strategies designed to dramatically slow the transmission of the coronavirus — are absolutely necessary but these efforts have a dramatic short-term impact as well as long-term implications. 

There are fears that a global recession is now unavoidable (and that the worst is yet to come); combine this with the limited purchasing power among potential home buyers, a problem that could remain even after the immediate COVID-19 risk subsides, and questions arise over how drastic the impact of COVID-19 will be on the housing market and the overall global economy. 

What can current homeowners, buyers, sellers, real estate investors and the professionals involved in this industry expect during these uncertain times?

To help answer this question, Zolo analyzed 20 years of sales activity and sold prices in two of Canada’s largest real estate markets, Greater Toronto and Greater Vancouver. (To see this analysis, please read Impact of COVID-19 on GTA or go to the GTA or GVA infographics below.)

Based on this analysis, here’s what to expect in the short- and long-term.

In the short-term expect dramatic declines

According to sales data, up until March 26, 2020, the spring real estate market was set for a record-breaking sales season, especially in Canada’s largest cities.

The Canadian Real Estate Association (CREA) reported exceptional sales for February 2020 — with a nationwide 27% year-over-year increase in sales. Toronto and Vancouver led the way with year-over-year increases in sales of 45.6% and 44.9%, respectively.

But even with these strong numbers, activity started to slow after March 11, 2020, when the World Health Organization declared COVID-19 a pandemic. Going forward, expect a dramatic decline in sales activity across all of Canada, at least for the short-term. How does this impact you? We take a look. 

How the COVID-19 crisis will impact homeowners?

Canadians that were homeowners prior to the COVID-19 crisis will need to concentrate on minimizing the overall cost of this pandemic while maximizing cash-flow. While this will look different for each homeowner, essentially it will require: 

  1. A drop in monthly expenses; 
  2. Prioritizing the payment of the mortgage
  3. Continue to pay bills; and
  4. Maintain or increase (if possible) monthly earnings. 

In short: Spend less than you earn.

#1: Drop expenses. For tips on household expenses to scrutinize, please see How Much You Should be Budgeting for Housing Expense. Another option sit to scan your debits or credit card charges and look for recurring expenses that are no longer necessary. Consider cancelling or postponing service for monthly subscriptions to apps that are no longer essential or entertainment purchases that are not critical, at present. The key is to chop and drop all expenses that don’t allow you to self-isolate and work-from-home in an effective manner. 

#2: Prioritize mortgage payments. If you find yourself worried about making current or future mortgage payments and you’ve exhausted other options — such as the skip-a-payment privilege, using a HELOC, or increasing your loan’s amortization — then it’s time to chat with your lender. Mortgage deferral relief should not be the first choice. Not only are you dependent on meeting your lender’s criteria — which changes from lender to lender and from day to day — but deferring your mortgage payments can add quite a bit of money to your overall mortgage loan. 

For example, if a homeowner started their $600,000 mortgage in March 2019, then a six-month deferral would end up adding almost $10,000 to their overall mortgage debt. 

Why? Because the deferral only applies to the principal portion of the mortgage payment; the interest portion must still be paid. To help, lenders are allowing homeowners to add this interest portion to their overall mortgage debt. The amount added to your mortgage depends on a number of factors including how much you borrowed, your current monthly mortgage payment, and how far into the term and amortization of the loan. Generally speaking, however, homeowners closer to the beginning of their mortgage term will end up having more interest added to their mortgage through deferral relief. 

#3: Continue paying bills. The key is to continue to pay all your bills, in full and on-time. When this isn’t possible, then prioritize paying your bills on-time. If you miss a payment or pay a bill late, this action is automatically reported to your credit history file. For some homeowners, just one missed or late payment can result in a lower credit score. Plus, a late or missed payment stays on your credit report for six to seven years. Avoid the hassles associated with lower credit scores and bad credit history by consistently paying your bills on-time. 

#4: Increase monthly earnings. Obviously, this is easier said than done, particularly during a crisis that requires self-isolation and social distancing. However, consider what talents or hobbies you can monetize to help bring in extra income. Or consider investing in learning a new skill that could pay off financially in the future. Every little bit helps. 

How the COVID-19 crisis will impact homebuyers?

It’s pretty standard for buyers to hesitate on taking the plunge on a property purchase at a time when unemployment numbers are rising. Perhaps there is a fear that circumstances around your own employment may change, or maybe you lost investment savings, which will negatively impact your debt ratios (the relationship between earnings/assets and debt that lenders use to qualify you for a mortgage). 

Over the short-term holding off on a property purchase may be the best option. 

As the crisis unravels, however, be sure to examine your personal financial situation. Those who aren’t worried about losing employment income and with sizable (and secure) savings, maybe in the best position to go house-hunting. That’s because in every market there are always sellers who need to sell (and buyers who need to buy). Perhaps the seller is relocating for work or selling to free up cash, or going through a divorce, but no matter the reason, these highly-motivated sellers are facing deadlines that cannot wait for the pandemic crisis to end. In these circumstances, well-positioned buyers can negotiate better deals. 

How the COVID-19 crisis will impact home sellers?

If you have not already listed your home, consider whether or not you must sell now. If you don’t, wait. If you do need to sell in this current environment, you’ll probably need to make some tough decisions in the near future. If you leave the property on the market, you may have to stomach a long wait between the list date and potential sale date as fewer buyers view your home. You will also need to consider how to handle low-ball or lower-than-asking offers — strategies all buyer agents will suggest to their clients. If you have to sell, consider the impact of selling sooner at a lower price, than risking a future sale amid unknown circumstances. 

How the COVID-19 crisis will impact real estate investors?

Like sharks, real estate investors often get quite active when housing markets struggle and we shouldn’t expect any different during this current crisis. 

Chances are there will be significantly fewer investors shopping the market but that doesn’t mean the investors will disappear. Real estate investors who are well-capitalized, with relatively little fear of reduced earnings and a strong appetite for risk, will certainly be shopping the market looking for exceptionally good deals. And they’ll find them even if some of these investors run into roadblocks as they try and secure financing for these investment purchases.

Real property is considered a safe place to invest for stable, consistent earnings (even with the high transaction costs associated with real estate investments). Combine this with the poor investment climate for bonds and real property has become the de facto fixed-income alternative for the last 10+ years. As a result, more and more investors have flooded housing markets, looking for a property investment and this has certainly helped push housing prices up in the last few decades. So, a word of caution to investors in this current market: pay attention to the fundamentals.

How the COVID-19 crisis will impact real estate professionals?

Already brokerages across North America adapted how to interact with buyers and sellers. 

Agents found creative ways to show properties using online or virtual formats, while brokerages quickly developed and enforced new company guidelines that respected the need for social distancing and prioritized virtual interactions. 

However, not all brokerages are well-positioned to implement these digital strategies. Companies, like Zolo, and housing market professionals that were proactive in leveraging tech and digital platforms to create business models without the reliance on in-person contact will certainly fare better in the short-term. 

While all real estate firms will share in the dramatic, but temporary, drop in housing market earnings, only those firms that proactively leveraged tech and digital platforms to create business models without the reliance on in-person contact will fare better in the short-term. As a tech-disruptor in a hard-to-adapt industry, Zolo is one of those early tech adopters. Now, faced with a short-term decline in revenues, these forward-looking firms will face fewer losses and a quicker turnaround in business interruption. 

For the real estate professionals that did not prioritize digital strategies prior to the COVID-19 crisis, not only will they see a dramatic drop in sales due to the pandemic’s impact, but in order to compete in this changing economic landscape, they’ll need to invest time and resources to create and transition to online and virtual methods of doing business. As a result, some brokerages (along with other real estate professionals) may not survive the short-term impact of this pandemic. 

Going forward, brokerages and agents will need to continue their efforts to market and sell listings without in-person marketing strategies. 

In the mid- to long-term expect a recovery…eventually

It’s hard to predict how long this current pandemic will threaten global health and financial security, but history shows that North American housing markets will bounce back. 

Over the last 20 years, global markets have faced two pandemics (not including COVID-19) and two financial catastrophes, and each time, housing markets eventually recovered. 

To get a better grasp on how these catastrophes impact Canada’s housing market, Zolo analyzed 20 years of sales activity and sold data in the Greater Toronto and Greater Vancouver areas. 

This analysis shows that the event with the single largest impact was the implementation of the federal mortgage stress test (on January 1, 2018). However, the event that took the housing market the longest to recover from was the Great Recession of 2008/2009. 

According to this analysis by Zolo, average year-over-year sales prices in Greater Toronto dropped almost 12% in 2008, when the U.S. housing market crashed and prompted a global recession. These losses were temporary, however, and by the end of 2009, the annual average home price increased by almost 14%, year-over-year. 

Toronto Region - Average Sold Price - Jan 2000 to Jan 2020

Average sale prices in Greater Vancouver didn’t drop in 2008; instead, there was a year-over-year increase in GVA’s annual average sale price of 2.48% and an anaemic year-over-year increase in 2009 of o.5%. 

Vancouver Average Sale Prices

For more GTA details read: The impact of COVID-19 on the Greater Toronto housing market

The bottom line is that the housing market can and will recover as long as the fundamentals of the market persist. For example, if jobs return to Greater Toronto, then we could expect to see the pent-up demand from buyers push sales activity into a seller’s market. The same is true for just about any market across North America.

What to expect in the post-COVID-19 real estate market

It’s impossible to predict just how long COVID-19 will impact the economy, but homeowners, buyers and sellers would be wise to remember how the fundamentals of the housing market, especially in larger regions, such as Greater Toronto and Greater Vancouver, generally don’t change. 

Prior to COVID-19, demand in these regions was really strong. Combine this with a population that’s still on track to grow and the potential of jobs returning to the markets, and the economic recovery that will eventually take place will more than likely lead to a recovery in the country’s housing markets. 

GTA Infographic: Impact of catastrophes on the Greater Toronto Real Estate Market

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Impact of COVID-19 on Greater Toronto's housing market - Infographic

Infographic: Impact of catastrophes on the Greater Vancouver Real Estate Market

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Greater Vancouver - Impact of health and financial catastrophes COVID-19
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