This article was originally published in the 2020 Summer digital issue of Invest In Style Magazine.
Apart from the obligatory “how are you?”, the most popular question asked of me during the various stages of the world’s response to COVID-19 was, “is it a good time to buy?” Combing through various economic reports and reviewing sale volume, months of inventory, and sale price data did little to help answer the question. For example, headlines predicted dramatic price drops in Canadian cities, especially Toronto and the luxury market. In fact, according to the data we now have, almost all cities in Ontario showed price acceleration, not deceleration, including secondary markets such as Hamilton. What follows is a list of other real estate predictions that I got wrong, despite the fact that these predictions logically follow an economic meltdown.
1. Toronto will, finally, become affordable
Unfortunately for many buyers looking for a home in Toronto, a meltdown didn’t happen. The lack of affordable product and the fact that the number of listings tightened more than the number of buyers is the culprit behind the amazingly buoyant Toronto market. The pool of buyers didn’t dry up, as I initially believed would happen, as the massive job losses witnessed in April and May were inflicted upon those who are typically renters outside of the Toronto core.
As such, demand didn’t dry up. What we saw, instead, was a brief pause – a calm before the storm of buyers. This massive descent of buyers onto the real estate market is what caused any home around the $1.25 million mark to disappear as soon as it was listed. However, market conditions didn’t lift because, unlike traditional recessions where there’s a flood of listings and few buyers, we saw the opposite – few wanted to sell as this asset retained its value unlike the equity markets.
I believed that cities faced another major obstacle: a change in what we prioritize (i.e., proximity and convenience over price point and large backyards) coupled with the ability to work from anywhere. I predicted that the advantages of close quarters and proximity to work and groceries would become perceived disadvantages and people would flee what they thought of as the virus-ridden city, to greener pastures. Not so. It appears that we haven’t forsaken life in a vibrant city that offers both convenience and community and that working from home hasn’t convinced all buyers to move where one can’t hear their neighbour on yet another Zoom call.
2. Canadians will stop taking on debt
Despite historic losses in jobs and a tumultuous political climate, mortgage credit grew during the COVID-19 lockdown. I was surprised as I’d anticipated a snap away from all spending, especially big purchases like a home. Yet, as we now know, people continued to buy homes and take on mortgages. Having said that, all the strong mortgage growth during this period did not reflect an appetite for more real estate. Rather, the growth was a reflection of stronger housing activity earlier in the year, as there is a lag between the date an agreement is signed and when a mortgage is actually issued (i.e., the closing date) and the deferral payments.
The mortgage deferral option added to the dollar amount of mortgages held by banks, making it appear as if people are taking out new mortgages when, in fact, they were just not paying existing ones. In other words, mortgage credit grew because people stopped paying their mortgages which added to the mortgage value on the banks’ balance sheet. However, such debt deferrals didn’t mean that Canadians continued to spend. Rather, reduced Canadian household debt related to conspicuous consumption such as shoes and vacations meant Canadians are taking a break – whether it be voluntarily or not – from spending.
3. Goodbye luxury real estate
Luxury properties tend to sit longer on the market because they have fewer buyers. Such properties were especially exposed to the uncertainty that came along with COVID-19 as luxury buyers, unlike the average buyer, aren’t as motivated by price drops to dive into a buying frenzy. This is why many luxury brands simply never put their products on sale. The same goes with luxury real estate – the “brand” of the street, and not the price, is what motivates luxury buyers to buy. Since discounts, then, don’t affect the behaviour of luxury buyers nearly as much as they affect the average buyer, fewer buyers in the luxury space went house hunting during the lockdown, causing luxury properties to sit on the market longer. I suspect that fears about the February drop in the equities market is also what held back luxury buyers; liquidating their positions during an equities downturn is not a smart idea. As such, luxury sales in the real estate market did stall…but for only a month, if that.
As the equities market soared again in April and May, many luxury buyers liquidated their positions, nixed their vacation plans then turned their sights north. Muskoka’s prices for lakeside vacation properties soared to new heights. This surge in vacation property prices, to be sure, is not motivated by a change in taste for country living over city living. Rather, the luxury vacation property price boom was lit by Canadian luxury buyers turning to Canada rather than Provence for a breather from the hustle and bustle of the big city, as evidenced by the fact that residential non-vacation properties for the Lakelands didn’t see similar demand. In other words, luxury real estate is not down and out – rather it’s up and on a lake.
4. We’ll be out of the woods come September
I’m hopeful that we’ll emerge from this economic crisis as we emerged from the meltdown in 2008 – resilient and barely noticing the economic chaos around us. However, my initial vision that all would “get back to normal” following the lockdown is blurred by several obstacles. The most obvious concern is the threat of a second COVID-19 wave as lockdown and another economic pause could be devastating. This likely occurrence means that September may not be the endpoint, but rather the beginning of another challenge.
Another concern that I share with many economic pundits is the ramifications of mortgage deferrals and the end of government support. Will Canadians be able to pay their mortgages? Historically, yes, as Canadians have a strong record of prioritizing debt repayment especially when it comes to their homes. However, we are in a new era and economic history doesn’t seem to be repeating itself. Finally, immigration has declined and the lack of international students coming to study in Ontario may affect Toronto, Waterloo, Kitchener and Hamilton’s student-housing-dependent market, thereby stimulating a correction as indebted investors abandon their sinking real estate ships.
While these obstacles loom, I’m reluctant to make any predictions as to whether or not these obstacles are insurmountable or if it is a good time to buy, as the only thing that is clear is that pandemic economics are far from predictable.