Douglas Todd: COVID-19 crisis set to hammer Metro housing prices

All it would take to create a sudden oversupply of housing would be for two per cent more owners in a particular market to list their dwellings for sale, says Anthony Scilipoti of Toronto-based Veritas Investment Research Corp.

The coronavirus-induced shutdown is having a significant impact on the factors that most fuel housing prices in Canada: wages, household debt and migration-based population growth.

The official, optimistic message from the Real Estate Board of Greater Vancouver at first sounds plausible.

The REBGV maintains with confidence that “pent-up demand” for housing, combined with low interest rates, will re-energize Metro Vancouver’s dormant real estate market once the COVID-19 lockdown ends and real life again kicks in.

But the counter-arguments are almost too numerous to mention. Coronavirus shutdowns are hammering the factors that most fuel housing prices in Canada: Wages, household debt and migration-based population growth.

The real-estate industry, including construction, normally makes up Canada’s largest sector, accounting for 15 per cent of economic output. And it’s almost inconceivable real estate values will not be slammed by the multitudinous ways the lockdown has weakened the finances of both Canadians and the trans-national migrants who invest in housing in Vancouver, Toronto and Victoria. Australia is already providing early warning signs.

Job apocalypse

There is a job apocalypse occurring in Canada. More than seven million laid-off Canadian workers have applied for Ottawa’s emergency COVID-19 benefit, receiving up to $2,000 a month. And this week the Liberal government launched an additional $73-billion wage subsidy program. The grim effects are sure to drag on.

Talk about a knock to confidence.

How could this shock of financial anxiety for millions of Canadians, especially those on low to medium incomes, not significantly affect housing choices in the future? Economic uncertainty does not exactly make people feel excited about buying a home. And, after all, interest rates have been low for years.

The downturn in house prices might come gradually. A house is not always as liquid as other commodities, since in many cases it is also a home. And as Westview realtor Barry Magee says, some rattled owner-investors can wait out a shock if it’s temporary, “primarily out of fear they would be selling at a low point.”

But it’s hard not to be persuaded by the suggestion of Magee and other industry players that, if the lockdown extends for any considerable time, it will turn prices lower.

Household debt trap

The second potential blow to Metro Vancouver’s super-high housing values is the debt trap — the record high levels of borrowing people in Canada and offshore have been doing to get into some of the country’s urban housing markets.

People have gone crazy with borrowing in Canada, fuelled by a fear of missing out and visions of the past two decades of ever-rising property valuations. But since COVID-19 came out of China, roughly half of Vancouver homeowners say they can’t fully pay their mortgages, according to a mayor’s office-commissioned Research Co. survey.

The frenzy has led to the average Canadian household paying out $1.76 in debt, typically on mortgages, for every dollar they earn in net disposable income. In Vancouver, that ratio jumps to a trauma-inducing $2.40, the highest in the country, the kind of ratio that precedes financial crises.

Vancouver, Toronto and Victoria households have the highest debt ratios in Canada, a country noted for its generally high mortgage levels. (Source: Steve Saretsky)

UBC geographer David Ley points out Metro Vancouver’s suburbs hold the highest debt ratios in the land, up to $3 for every $1 in income. That’s especially the case in neighbourhoods where Ley believes young families have been buying starter homes. “If there is ever a meltdown, these areas would be particularly at risk.”

One of the most important insights into debt and the future of urban Canadian housing comes from Anthony Scilipoti, president of Toronto-based Veritas Investment Research Corp.

Scilipoti’s researchers have discovered that half the country’s property investors (such as the tens of thousands who have bought condo units in towers to rent out) aren’t getting enough cash from tenants to cover their mortgage costs. “There’s only so long they can hold on,” he says, before being forced to sell.

All it would take to create a sudden oversupply of housing would be for two per cent more owners in a particular market to list their dwellings for sale, Scilipoti says. “This will take time to play out,” he says, but the downward process is in motion.

Migration impact

The third major factor for Canadian real estate is the migration of people and capital.

Start with the drastic drop in tourist numbers. With borders virtually closed to international travellers, investors who relied on short-term rentals like Airbnb to hold onto their properties have been left in the lurch. Many Airbnb hosts will likely be forced to sell.

Then there are larger immigration trends, which are arguably the biggest thing affecting housing prices in Metro Vancouver (and Toronto), as suggested recently in The Vancouver Sun by both former NDP premier Mike Harcourt and Anne McMullin, the head of B.C.’s Urban Development Institute, which represents builders.

Even though the federal Liberals have hiked immigration targets (from 250,000 per year in 2015 to 350,000), citizenship ceremonies have been cancelled during COVID-19 confinement and the processing of would-be permanent residents is being held back.

This pandemic is sure to affect the choices of would-be immigrants, who have accounted for 85 per cent of population growth in Metro Vancouver. And it will also affect people who might buy urban Canadian properties with money earned offshore, which is the gasoline that has been accelerating Vancouver’s already-unaffordable housing costs.

The B.C. NDP government has tried to respond to the strong flow of offshore capital by strengthening the surcharge on foreign property buyers and by introducing the speculation and vacancy tax, which has an impact on “satellite families” in which the breadwinners earn their incomes outside the country and therefore aren’t subject to Canadian income taxes.

Those housing taxes will continue to be influential. “If the COVID-19 pandemic lasts longer than three months … price drops will be inevitable” in B.C., says Magee, noting there will be particular pressure on owners facing the speculation and vacancy tax, which has quadrupled to two per cent this year from 0.5 per cent.

A related migration factor for Canadian housing, rarely discussed, is the almost one million people who until recently were in Canada on temporary study and work visas.

Australia offers an early warning sign about this cohort: International students and temporary foreign workers are leaving that country in droves. Australia’s acting immigration minister says 300,000 people on temporary visas have already left since January.

A former senior immigration official in Australia, Abul Rizvi, predicts up to one-quarter of foreign students and workers will depart by the end of the year. That is destined to soften Australia’s housing and especially rental prices, which many will find a blessing. (Canadian immigration officials did not respond to requests for data on study and work-visa holders in this country.)

The Vancouver, Toronto and Victoria housing markets have been somewhat difficult to forecast for decades, since prices in these cities are not as closely tied to local wages as they are in many places. Offshore factors are highly significant for these globally desirable cities.

Yet, even though it’s hard to predict the future with certainty, it is safe to suggest some form of house-price correction will come in Canada’s urban markets, especially early next year.


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