In this article, we discuss the myth behind a COVID-19 recession resulting in the 2008-level real estate prices. We also provide some reason why now continues to be a good time to invest in real estate. Lastly, this article reflects on somethings to keep in mind for purchasing your first (or second or third) investment property. 

The Myth that Any Recession can Burst the Real Estate Bubble 

It’s often conventional wisdom that housing prices will decline during a recession, but this isn’t the always case. The 2008 financial crisis originated from subprime mortgages and the U.S. property market, among other factors, caused the decline in housing prices and subsequently the greater financial disaster. 

Subprime mortgages are not the reason for the possible recession that Canada could face. Now, the cause is the COVID-19, so it’s not likely that real estate prices will be affected as much as they were in 2008. Many experts across Canada believe that real estate prices may decline 5-10% at most due to COVID-19. Even though, until now, this hasn’t affected the market: monthly numbers from real estate boards across the country have continued to show a steady average price of the homes sold. 

COVID-19 is leaving many unemployed, reducing immigration to Canada, and providing us with economic uncertainty. However, the pressure exerted on the housing market by these factors is limited. Other COVID-19-related events, such as the slowdown of new housing constructions, are exerting upward pressure on real estate prices due to reduced supply. Further, if Canada can reopen its economy successfully and safely, the recession could have a smaller impact. 

Why You Should Consider Investing in Real Estate Anyways

The stock market’s prices have been jumping up and down due to on-going news about the Coronavirus. If you’re looking for a bit more stability in these unprecedented times, then residential real estate may be a good bet. 

As an income stream, real estate is relatively secure during a recession. Tenants will generally continue paying rent as they still have a legal obligation to do it. In contrast, a company whose stock you purchased may cut their dividends or the stock may see a sharp decline in value. 

Interest rates in Canada are still low, as the Bank of Canada attempts to stimulate the economy. This may reduce your cost of borrowing to purchase a home. If you can lock in a good mortgage rate for an investment property at this time, it’ll result in a better return on investment and cash flow down the road. 

A Few Best Practices for First-Time Real Estate Investors 

Just because now is a good time to invest, doesn’t mean you should jump right into any property you can get your hands on. If you purchase an overpriced property when you aren’t doing well financially, it could hurt you more than it could help you. 

Calculate your Cash Flow

In the world of real estate investing, cash flow is king. Cash flow is what you’re spending (cost of monthly mortgage payments and repaying other debts associated with the investment property) versus what you’re taking in (usually rental income). If you have a positive cash flow, you’re on a good track. Before buying an investment property, it’s important to run the numbers…. And, then, run them again to make sure you didn’t miss anything. When calculating your cash flow, make sure to ask yourself these questions:

● How much will your monthly mortgage payments be? 

● How much will renovations cost? 

● How much can you rent out the property for? 

● What happens if you can’t find a tenant to pay the price you’re looking for? 

Assess your Financial Position

It would be best if you also looked at your financial circumstance. Just because you have a good job today, doesn’t mean you’ll have one tomorrow. Especially not in the era of COVID-19. Would this investment still make sense if you were laid off or furloughed? Similarly, if you’re a business owner, could you manage the investment property’s mortgage if we face a second lockdown? Although residential real estate tends to be a safe investment, it’s essential to judge your financial position before committing to a purchase. 

High-Quality Properties in a High-Quality City

Finding the property with the lowest per-square-foot cost is usually not the best way to go. To find an investment property that will provide consistency in economic uncertainty requires buying in a high-demand area, even if it’s more expensive. This can better guarantee renter demand. 

Further, fixer-uppers are often of great value. You can renovate the property and get an even larger return on investment, however, there are some fixer-uppers you want to avoid. Properties with water damage or structural problems are often ones to avoid, especially as a first-time real estate investor. Even some veteran real estate investors stay away from these properties. 

We’re unsure if COVID-19 will bring a full-blown recession that’s as devastating as the one in 2008. However, it’s highly unlikely we’ll see the same kind of decline in home prices. Nevertheless, it may still be a good time to invest in residential property. Investment properties can provide a consistent income in times of uncertainty. But if you are a first-time investor, make sure you figure out your cash flow, assess your financial situation, and choose a high-quality property before making such a financial commitment.  

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So, is the real estate bubble finally popping? Well… not necessarily. There may be headlines claiming a real estate armageddon, but everyone has their own thesis. In this article, we reflect on what some of the top experts forecast for the future of the Canadian real estate market. We also review the factors steering us away from the idea that the real estate market is about to burst.

What is Everyone Saying About the Future of Canadian Real Estate?

There has been no shortage of predictions and research reports on what to expect in the near- and long-term of Canada’s residential real estate market. The CEO of Canada Mortgage and Housing Corporation (CMHC) provided a gloomy outlook on what’s to come. In a testimony to the House of Commons, he predicted that home prices could fall between 9-18% over the next year. One of the major fears that Siddall had was a “debt deferral cliff”, where mortgage deferral programs would come to an end and Canadians would need to start making payments again — whether they have the income to or not.

Not all experts agreed with Siddall. RBC forecasted that housing prices may decline 5% compared to last year; CIBC forecasted a 5-10% decline; and Moody’s, a financial services and research firm, estimated an 8% decline in Canadian real estate prices. And, in a surprising turn, TD predicted that home prices may increase by as much as 13.8% in some provinces by the end of 2020. While a 5-10% decline in housing prices is still significant, it’s nowhere near the possible 18% that Siddal had in mind.

Currently, CREA and other real estate boards have not reported significant declines in real estate prices, despite sales activity plummeting across the country. Not only has the pandemic resulted in fewer Canadians looking to purchase a property, but it has also delayed those looking to sell. Once restrictions of social gatherings and the threat of Coronavirus lifts, we may see momentum return to the real estate market on both the buyer and seller side.

Why We Likely Won’t See the Real Estate Bubble Pop

There are plenty of uncertain factors. For example, we don’t know how long social distancing measures will last in each province. We’re also unsure of how long it’ll take before we find a vaccine for Coronavirus. The longer social distancing is required and the longer a vaccine takes, the more negative effects we’ll see in the real estate market.

However, many factors point towards a healthy market once the COVID-19-era passes. This includes pent-up demand and supply, low-interest rates, and delayed housing inventory.

Pent-Up Demand and Supply

Many individuals hoping to buy or sell their home are waiting until Coronavirus ends. With the pandemic in place, it’s much harder to go through the whole process of hosting open houses and finding a home/buyer. This is one of the reasons why the price of residential units sold did not drop significantly or at all — because supply and demand for real estate declined in equal parts. As a result, it’s reasonable that sales activity will skyrocket once social distancing measures loosen up.

Further, the high cost of properties in cities such as Toronto and Vancouver is the result of a limited housing supply and high demand. The COVID-19 situation is neither reducing the demand nor increasing the supply — the ingredients required to pop the bubble. Instead, COVID-19 is reducing both demand and supply.

Low-Interest Rates Mean More Demand

When interest rates are low, demand for property goes up as it’s now cheaper to borrow money and purchase a property. Due to the Coronavirus pandemic, the Bank of Canada in March cut interest rates significantly and is currently holding it at 0.25%. This results in less costly mortgages (for the most part). Although we continue to see more uncertainty, these low-interest rates could drive even more demand in a post-COVID-19 world, meaning prices will only go higher if supply remains the same.

COVID-19 Has Also Stalled the Supply of New Homes

The construction of new homes is one way that the market can increase its supply of residential homes.  Although most construction is still permitted, the requirement for construction workers to socially distance themselves onsite has ultimately reduced productivity. In the prior mentioned report from CIBC, it estimates that social distancing regulations and the lag in overseas shipments have reduced construction productivity by 40%. This will ultimately result in a reduced supply of new housing.

What Factors Could Lead to Weaker Real Estate Prices?

Coronavirus has also birthed factors that could reduce demand to the point that prices may fall in the future. Due to the mass unemployment and rustles in the stock market, Canadians might prefer to delay their purchase of significant investments such as a home. Further, buyers who think that real estate prices will crash could be holding off until prices come down. Both of these factors could result in less demand. Although the unemployment numbers may point to a weaker economy, many of these jobs are layoffs. Companies that did lay off employees will likely rehire them once society recovers from the pandemic.

Many of the large Canadian banks predict that real estate prices will decline a few percentage points. This decline is possibly a market correction but not the bursting of a real estate bubble. Pent up demand, low-interest rates, and delayed new constructions could even result in higher real estate prices — not lower. There’s likely still time before a Coronavirus vaccine is found, but when it is, both buyers and sellers will be back in action!

The post What the Canadian Real Estate Market Could Look Like After COVID-19 first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

Although it’s a tough time, it’s important to remain hopeful. The federal and provincial governments have worked with the private sector and with other organizations to help those in financial distress due to COVID-19. Some of these measures may have an impact on your home purchase or sale.

In this article, we look at what measures and policies have been put in place to help fight or recover from COVID-19. Particularly the ones that affect the home purchase and sale process. This includes the restrictions and bans on open houses, the ability for homeowners to defer mortgage payments, and interest rate cuts by the Bank of Canada.

The Ban on Open Houses

Open houses are an easy way for COVID-19 to spread. A dozen people wandering inside a 3,000 square foot or smaller home is the ideal environment for transmission. That’s why real estate boards in Canada have called for the end of open houses ever since measures were put in place to prevent the spread of COVID-19. As a substitute, agents have gotten creative with technology and held open houses through online live streams or pre-made video tours.

Most realtors now will not conduct an open house for the sake of safety and the law. This is not only due to the strong urges from realtor boards, but provinces like Ontario have prevented gatherings of more than 5 people, which can make the idea of an open house more or less impossible. Instead of urging its realtors to not conduct open houses, some boards like the Alberta Real Estate Association (AREA) have outright banned open houses.

If you’re currently looking to purchase a property, you’ll likely have to make do with virtual home showings. If you’re very serious about a property, it may just be a reason for a realtor to provide an in-person showing.

As a seller, you need to understand that realtors are now more limited than before. Without the opportunity to hold open houses, your agent has lost a tool in their belt, but that doesn’t mean that they won’t continue to do the best that they can.

The Ability to Defer Your Mortgage Payments up to Six Months

When a bank provides a mortgage, the debt doesn’t stay with the bank for long. They commonly pool together these mortgages and sell it to someone else, taking a cut on the way. What they sell is called a mortgage pool. If banks want to keep providing mortgages, there needs to be demand for these mortgage pools. To help provide this liquidity, the Government of Canada committed to the Insured Mortgage Purchase Program (IMPP). In this, they’re prepared to purchase $150 billion of insured mortgage pools. This is to ensure lending continues in this dire time.

As a result of the IMPP, the government has also ensured agreement with the leading six Canadian banks that they would allow for up to six months of mortgage payment deferrals. This will ultimately vary on a case-by-case basis. Banks are also set to provide relief on other credit products such as credit cards.

The ability to defer mortgage payments will provide Canadians with some much-needed financial flexibility. If you’ve lost your jobs or lost other sources of income, it can help to defer payments till later on so that you can use your money on necessities like food.

However, this deferral will not be interest-free in most cases. So, if you do decide to defer your payments, you’ll end up having to pay more money back to the bank.

This deferral also helps those who are renting. Landlords who can defer their mortgage payments may be more lenient in deferring or reducing rent.

Estimates believe that these deferrals will leave homeowners with roughly $663 million in their pockets per month. This is based on monthly Canadian mortgage payments averaging to $1,326.  However, everyone is now rushing to their bank to defer their next mortgage payment—whether they need to or not—and therefore, it may take some time to get through.

This opportunity to defer your mortgage can be useful if you’re selling your property due to a loss of income, since this may mean you need extra capital. Delaying your next mortgage payments can hopefully put some money back in your pocket until the economy returns to normal.

Interest Rate Cuts by the Bank of Canada

The Bank of Canada announced three cuts to interest rates in March. This effectively brought the rate to 0.25% and has brought prime interest rates to 2.45%. In a statement, the Bank said that these rate cuts would cushion the economic impacts of COVID-19 by easing the cost of borrowing.

At first, this brought down the cost of borrowing money, meaning lower mortgage rates. That’s why in the first weeks of the rate cuts, there was an unprecedented rise in mortgage refinances. And although day-to-day Canadians will have an opportunity to borrow at lower rates, the rate cut by the Bank of Canada does not equally reduce the cost of borrowing at your local bank. Instead of passing on the complete interest reduction to the consumer, many banks are increasing their margins. This is because lenders are seeing more risk in the borrower’s market. As more individuals lose their jobs, the risk of them defaulting on their loan goes up. These higher margins are to take this into account.

Overall, it may still be cheaper to obtain a mortgage now than before. But with such a high demand for mortgages at current interest rates, banks may further fatten their margins. Although the era of COVID-19 may decrease the number of transactions going on in Canadian markets, we can hope that lower interest rates can improve that situation.

The coronavirus has resulted in new policies and changes such as a ban of open houses, the ability to defer your mortgage payments, and lower interest rates. These changes will likely help or hinder your home buying process. However, it’s important to remain hopeful that we’ll get through this storm.

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