The last several weeks have been nerve-racking for Canadian homeowners and the world at large. A global pandemic and the resulting economic turmoil have combined to create an extreme level of unease for home buyers and sellers in Canada.
To better understand the picture, Properly’s experienced team of data analysts and real estate experts conducted a deep dive into the impact of past pandemics and economic downturns on the housing market. While we can’t predict what will happen in the future, we are here to provide perspective on patterns observed in the past.
Our research generated the following insights:
- We have observed a dramatic decline in sales volumes and related real estate activity, such as home showings and open houses. Home showings in Ontario are down 78% from the same period last year. Across Canada, sales volumes are falling over 30% to a 20-year low.
- Unlike sales volumes, house prices typically change more slowly in response to economic shocks, and we have yet to see much movement in prices. We expect the timing and magnitude of the impact on prices to depend on the duration of the social distancing period, the depth of the resulting economic recession, and the nature of government stimulus programs.
- Oil-producing regions of Canada, particularly Alberta, Newfoundland & Labrador, and parts of Saskatchewan, are the most at risk for significant price declines given the dual-impact of an oil price shock and pandemic-fuelled economic recession. During the year following the 2014 Oil Shock, in markets such as Calgary sales volumes declined 26% and prices declined 2.7%; during the 2008 shock and Great Recession sales volumes declined 35% and prices declined 6%.
- Zooming out to the global level, in past epidemics such as the 1918 influenza and SARS, economic activity and real estate sales volumes fell sharply during the epidemic period, with a less sustained impact on prices. In these examples, the market quickly recovered following the epidemic. We are tracking a similar pattern in China today, with economic activity and real estate sales rebounding from near zero to 50-60% of prior-year levels in the weeks since the cessation of quarantines and control measures.
Economic Shock: What happened to real estate during the 2008 Great Recession?
The 2008 great recession provides a reasonable benchmark for understanding what might be in store for Canadian real estate as a result of the COVID-19 recession.
During a recession, lower income levels and higher unemployment reduce purchasing power and demand, and homeowners’ impaired ability to cover their ownership costs results in forced selling and increased supply. This imbalance typically results in a spike in months of inventory and falling home prices.
Toronto and Vancouver saw meaningful declines in prices during the Great Recession. Over the three months ending February 2009, Toronto saw benchmark prices decline by 5.4% and Vancouver saw benchmark prices decline by 7.4% (source).
Diving deeper into the parts of the housing market that were most impacted, the Great Recession hit certain segments of the market harder than others (CREB data).
- Expensive homes (home values above the median in the community) experienced a 45% declines in sales volume, whereas less expensive homes only saw 26% declines – buyers gravitate towards more affordable homes during difficult times
- Older homes (homes more than 30 years old) experienced the most significant declines in home values – buyers prefer homes that require less upkeep and maintenance
- The largest homes experienced the most significant declines in home prices (>2,500 sf) – buyers place less value on incremental square footage above a certain threshold, especially when cash is tight
- The larger the ‘addressable market’ for a home (the number of people for whom the home would be appealing), the more likely it is to hold value during a market shock. Unique homes, highly expensive homes, homes backing multifamily or with a less desirable location, will generally experience the largest price declines.
COVID-19: What are we seeing in Canada?
The COVID-19 pandemic has resulted in prospective home buyers and sellers responsibly practicing social distancing, and this has resulted in a decline in overall real estate activity.
Showings and other real estate activity are in decline. Based on data from ShowingTime, a company that facilitates and tracks real estate home showings, Ontario is experiencing a rapid decline in activity commensurate with what has been seen in other markets during epidemics. The data reveals that real estate showing activity across Ontario has fallen off severely with a 78% decline relative to the same time last year (source).
We’re also seeing rapid declines in sales volumes across the markets in which Properly operates. Home sales in Calgary are down 71% since social distancing measures were put into place around March 15th (see chart below).
Similar sales declines are also happening in markets across the country – in Ottawa, for example, home sales are down 69% over the same time period. In Toronto, sales volumes are down 73% over last year and this decline is fairly consistent across the Greater Toronto Area (source). Most markets are seeing a comparable or greater decline in new listing volume.
On the economic front, surging unemployment and almost 10% of mortgage holders (500,000 homeowners as of early April) requesting a deferral of their mortgage payments (source). If this is a result of people being unable to afford to make mortgage payments, it could be a signal of potential forced selling in the future, which would drive down prices.
Across all cities, the housing market has slowed to a near standstill as individuals are forced to stay home While technological solutions such as virtual tours may help some urgent buyers find their next home, we expect most buyers to delay purchases. Many buyers want to see a prospective home in-person to get a feel for the space and condition, and many sellers are hesitant to host showings and open houses have been banned across most of Canada. Further, many buyers are nervous about making offers given fears (or hope) that home values might decline in the near-term, and many sellers are hopeful that market conditions will stabilize and so are delaying their sale timeline.
COVID-19: What are we seeing in other counties and what happened during past pandemics?
In China, transactional data from Capital Economics reveals that while 2020 daily property sales across 30 major cities are still well below 2019 levels, they are rebounding at a rapid pace as the country works to restart its economy.
A reasonable working assumption is that, at one point between now and July, the infection curve will flatten. We have seen this in China, South Korea, and very recently in Italy (source).
What have we seen in past epidemics? During events such as 1918 Spanish Flu or the 2003 SARS outbreaks, there is a pattern of economic activity falling sharply during the epidemic (e.g. ~10% decline in GDP or industrial production over the course of the epidemic) followed by a recovery after the epidemic is contained. During SARS, Hong Kong home prices did not fall significantly, but sales volumes declined as customers stayed home and practiced social distancing. In the period after the epidemic, sales volumes recovered to prior levels.
That said, price reductions are typically transitory after epidemics and urban housing markets are resilient to major shocks originating from epidemics; cities return to their pre-epidemic price paths following the shock (source, source).
Pulling it all together: Economic recession + COVID-19 Impact
The dual impact of (i) economic recession, and (ii) COVID-19 is truly new territory. This said, we expect real estate sales volumes will continue their steep decline over the coming weeks. What happens to house prices is less clear, and will depend on how long the social distancing period extends, and the depth of the resulting recession.
At Properly, we’re working to answer top-of-mind questions for our customers. Using both the practical expertise of our Realtors (including first-hand experience from the Great Recession and the oil price shock in 2014) and the data science skills behind our Instant Estimate, we’re here to provide information for Canadians looking to buy or sell this year. For additional insight on the Canadian real estate market during COVID-19, please contact us at email@example.com.