Toronto Real Estate: Is This The Worst Market Ever?
The Covid-19 pandemic has had an unprecedented effect across the entire world. Entire countries have been locked down and there has already been an astonishing loss of human life. In terms of real estate, it has caused shocks in both supply and demand for real estate.
We’re back with our weekly chats and this week we are going to discuss what’s currently happening in the real estate market and what we expect to happen in the coming months
The Current Real Estate Market
In mid-March, there was significant panic as the entire real estate market froze. We were even taking it one day at a time as new Covid-19 developments occurred and we watched all branches of governments trying to respond. There was significant fear and misinformation in the market and it felt like no one really knew what was going on.
Like many other industries, we had to adjust our business and adapt to the changes. We took that time as an opportunity to stop, listen, and watch, because we didn't want to contribute to the misinformation and panic that was occurring. Once we “got our footing”, we began educating landlords on how to work with tenants during that crisis and throughout the month of April, we hosted educational webinars every week. We enlisted help from top experts like paralegal Elaine Page to help landlords understand how they should be addressing things like requests for rent deferrals, and the steps they should be taking to protect their real estate assets. People didn't need to hear what was happening in the real estate market at that time because as we always say, “real estate is a long-term game”. But now we're six to eight weeks through the crisis, and we can assess, “Is this the new normal?” and what impact “flattening the curve” has had on the real estate market.
Here is how the Toronto condo market has performed this year:
There was a large decrease in the number of sales year-over-year and a 78% decline from March to mid-April which is now slowly improving with a 73%, and now 66% decline based on the most recent sales activity
New listings coming to market decreased 50-60%, year over year - this means we had a decrease in demand but we also saw a decrease in the supply and we didn't have a flood of inventory coming to the market (who wants to sell right now anyways??)
Real Estate Sales Have Bottomed
Since mid-April, sales have continued to increase, and we have seen a 57% increase in firm sales from the lows. This is proving that people are beginning to change their activities and slowing starting to come back to the market from the sidelines. We are seeing a gradual pick-up and quality properties are continuing to sell. Prices are also holding remarkably strong. Every day when you wake up, the sun is still shining, there's air to breathe, and people are adjusting to the new normal. Remember that housing is still a basic need, and especially in a pandemic, people need shelter; a place to live.
Rental Market Has Softened
The leasing market is much more closely aligned and correlated with people’s incomes and employment levels. We have seen decreases in the number of units rented 50-60% year-over-year and active inventory has increased over 250%. This is being caused by a few reasons:
The Airbnb Market has Been Devastated. There is no tourism and no one is staying in these units. Some condo buildings that were known as “short stay hotels” like 12 and 14 York have over 120 units currently available for lease in the building. These issues are compounded by the fact that many buildings are not allowing real estate showings and trying to show a tenanted unit is not recommended (and may even be impossible) with the risks associated with Covid-19.
Unemployment has Spiked. Covid-19 has had an unprecedented effect on the economy, especially in the service industry and many people have been laid off or claiming benefits. Landlords are scrutinizing tenants even more right now to ensure that they are employed and will be able to pay their rent.
The Borders are Currently Closed. Last year Canada had over 350,000 immigrants which was a major factor driving the real estate market. Right now people literally cannot get into the country.
Schools are Closed. Toronto has a huge international student population that comes every year to study at our world-class educational institutions and right now those schools are closed.
The good news is that this is only temporary. The economy, borders and schools will open up again and the extra supply will be absorbed by the market. When when we look at our medium- and long-term prospects, nothing has changed and the underlying fundamentals are still in place.
The Impact To Pre-Construction Condos
Like all other industries, the condo development industry is facing cost pressure as a result of Covid-19:
Canadian Dollar Is Down: The purchase of large quantities of commodities like steel and concrete are typically denoted in United States currency or indirectly affected by fluctuations in it. During Covid-19, the Canadian dollar has gone down from a value of 0.754 in February down to 0.713 in May (every $1 Canadian is worth $0.713 $USD) – that’s a decrease in purchasing power of about 5%. This means that many of the materials needed to construct a building that you need to import have now increased by 5%! Builders are just going to pass this on to consumers.
Construction Will Take Longer: While some construction sites may still be open, it is not business as usual. Employers must ensure their employees can work safely which now means putting in appropriate physical distancing requirements. This means that fewer works can be on a job site and construction timelines are going to be extended. The labour shortage that already existing before Covid-19 has also only gotten worse.
Zoning Approvals Will Take Longer: To get a high-rise tower through all of the government zoning and planning approvals required took over 10 years pre-Covid. After the pandemic passes, there will be a backlog of projects that need reviewed and fewer people to do those reviews. This will now take even longer unless significant changes are made to expedite the review process.
Prices Are Going to Increase
Add all of this together means that prices are going to continue to rise, plain and simple. This is what we are hearing from developers too – you will not be getting pricing discounts or huge financial incentives. For developments that are in the middle of their sales, they can’t cut prices because they will alienate the clients that have already purchased. They are also facing increasing costs which will impact their profitability. Many buildings have already met their financial requirements for funding and will just hold onto any unsold units and wait for the market to fully recover before bringing them back to the market in a few years.
Cancelled Projects Will Increase
Any development that has not yet started construction or locked in their raw material costs yet will be looking at their pro forma financial statements. If the numbers no longer make sense, they are simply going to cancel the project and refund buyers their deposits. We think you will see this for a lot of buildings that launched a few years ago and have not broken ground yet; our developer contacts are predicting over 2,500 units will be cancelled this year. This means that the number of completed units will be decreasing over the short-term which will restrict supply into 2021.
Government Stimulus Will Make Things Worse
The entire economy has virtually been shut down for over 6 weeks. A shut-down of this scale and breadth has never been seen before. We expect the government to launch stimulus projects soon and one of the best ways to do this is through infrastructure spending; shovel in the ground opportunities that they can start construction on right away. Subways, highway projects, new buildings – these will all further take skilled tradesmen away from the condo development industry.
Inflation Will Not Be A Concern
The government has to print money to pay for these stimulus packages, but it won’t cause a spike in inflation like many are predicting. Inflation is based heavily on the money supply and all the government is doing is replacing the dollars that consumers used to spend in the economy. In fact I’d argue that deflation (prices going down) is going to be a bigger concern in the short-term for the consumer segment of the economy because many producers literally can’t sell their perishable goods. Interest rates are going to stay down for the foreseeable future in order to continue to stimulate the economy.
Focus Long-Term
Real estate is a long-term investment. If anything, Covid-19 has shown what an amazing and resilient country Canada is. Canada is and will continue to be one of the best countries in the entire world to live in. Demand forces for real estate are going to continue to be strong and there will continue to be significant supply side challenges. Stay invested for the long-term, stop checking your property values every day and take comfort knowing that you are building generational wealth with each passing day.