Canadian real estate kicked off 2020 with a bang, but there are conflicting opinions as to how we’ll finish out the year. Canada’s federal housing agency has warned that average house prices could fall by up to 18 per cent over the next 12 months – a dismal prediction that’s being challenged by RE/MAX based on market activity from coast to coast.

Basic economics has taught us that supply and demand dictates housing prices, and according to what RE/MAX brokers are reporting at ground level, housing inventory is down in many markets, demand is still high, and multiple offers are a common scenario. Assuming that demand continues its current course, Canadian real estate prices will likely remain relatively stable or experience a single-digit price correction at worst – which is a far cry from CMHC’s dire decline of up to -18 per cent.

Is Canadian Real Estate In Trouble?
Late last year, RE/MAX expected Canadian real estate prices to rise by 3.7 per cent in 2020. A few short months later, COVID-19 threw everyone for a loop. This week, Canada Mortgage and Housing Corp. (CMHC) has predicted that average home prices could decline anywhere between nine and 18 per cent in the coming year, due to the economic impacts of COVID-19. In addition, CMHC warns that mortgage deferrals could rise from 12 to 20 per cent by September, with up to one-fifth of all mortgages ending up in arrears, if the Canadian economy does not recover sufficiently.

“The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability,” CMHC CEO Evan Siddall told the House of Commons Standing Committee on Finance earlier this week.

However, the Big Banks, economists and many Realtors aren’t aligned with CMHC’s expectation.

What the Big Banks are Saying About Canadian Real Estate
According to this recent article published by The Globe And Mail, CIBC said Canadian real estate prices could fall between five and 10 per cent this year compared to 2019. Similarly, RBC forecasts a decline of seven per cent, while BMO expects a five-per-cent decline.

“[Mr. Siddall] said that all these things will happen if the economy ‘does not recover sufficiently.’ That’s a very broad statement,” CIBC deputy chief economist Benjamin Tal told The Globe And Mail. “Without looking at the assumption behind that statement regarding GDP growth, unemployment rate and so on, it is very difficult to assess the likelihood of such a prediction. Is it a worst-case scenario, or the base case? I think he was highlighting a worst-case scenario,” he said.

A single-digit decrease in house prices can be classified as a correction, and is a far cry from CMHC’s trough of -18 per cent.

RE/MAX Brokers Report Low Housing Inventory, Multiple Offer Scenarios
RE/MAX brokers in some of the biggest Canadian real estate markets say a dramatic price drop is unlikely under current conditions, barring any major unforeseen circumstances – and as we’ve all come to learn recently, anything is possible. But assuming current market conditions remain stable, the current inventory of homes for sale continues to fall short of demand – even amidst this pandemic, social distancing measures and the economic fallout.

Here’s what RE/MAX brokers are reporting on Canadian real estate in some of our biggest cities and key housing markets.

ATLANTIC CANADA

Newfoundland real estate has been a consistent “down market” since 2014, thanks to weakening oil prices and a shaky local economy. COVID-19 dealt another blow, but even so, the economy was already slow in the region. Interestingly, RE/MAX reports a spike in multiple offers in the region recently.

Multiple offers have been virtually non-existent in Newfoundland since the peak in market activity in 2014. Since the pandemic, there have been a dozen. There has even a home for sale that received four offers, when previously even one offer may have been uncommon.

Housing prices in Newfoundland remain consistent right now, and the market is better positioned than originally anticipated. The pulse is good, and this is unlikely to change in the near future.

Halifax real estate was riding high before the pandemic, with a lot of good foundational activity happening across the region. Simply put, the Halifax real estate market was hot, with low housing inventory common across the marketplace. Specific to the Halifax housing market, multiple-offer scenarios continue to be common, with brokers and agents reporting sequential multiple offer scenarios on their last three, four, five deals. That’s certainly the making of stable house prices, or even increasing slightly.

About one-third of Halifax listings in recent weeks have sold over asking price, which bodes well for house prices in the near future. Showings are up, and new listings that are coming online are up slightly as well. There’s consumer confidence, but buying activity is heavily dependent on how people have been affected financially. If current trends continue, an 18-per-cent drop in home prices is highly unlikely.

ONTARIO

Ottawa real estate has experienced an increase in home prices and a decrease in days on market – both good indicators that the housing market is stable, at least for the time being. The current seller’s market is characterized by low housing supply and high demand, which continues to drive up prices. In fact, within the last two weeks, Ottawa’s list-to-sales-price ratio has a median of 100 per cent. Most properties are still holding offers, with multiple-offer scenarios a common occurrence and homes selling for over asking price.

Within the last two weeks, compared to the previous two weeks, RE/MAX has experienced an influx of inquiries regarding properties for sale, with questions about the process of buying/selling homes. Consumers in the region want to be informed again about the housing market.

Toronto real estate is experiencing a proportionate decline in new listings and buyers, leading RE/MAX to conclude that prices should remain stable. Toronto homes are currently selling for asking price, or slightly above or below that price point, but the region has not experienced any decline in price and if current conditions continue, there’s nothing to indicate that prices will fall between nine and 18 per cent, as CMHC has predicted.

Toronto continues to experience multiple-offer scenarios, with RE/MAX reporting a consistent two or three offers on every listing. These conditions were prevalent prior to the lockdown on March 13, and continue to be the case, even with social distancing measures in place and the economic fallout. Toronto’s housing supply shortage continues, and demand remains high, as evidenced by the many multiple offers RE/MAX is seeing across the board.

The pandemic has negatively impacted listings, because many homeowners who were planning to sell are now opting to hold on to their listings, unwilling to host traditional open houses at this time. When government financial aid runs out and the six-month mortgage deferral period expires, people may then start listing their homes if they can’t afford to keep them. However, right now this is not the case. If a flood of listings does occur in Toronto this fall, it will be a short cycle.

London real estate experienced a large downturn in the number of sales in April and May compared to April/May 2019, but the region has also seen a large decrease in the number of listings compared to last year, which is causing multiple-offer scenarios.

The London housing market is holding strong, homes for sale are being scooped up and prices remain relatively stable. Within the past 14 days, RE/MAX reports 180 firm sales, 83 of which went for over asking, and 20 sold at full price. In April 2020 the average sale price in London was up slightly by a couple of thousand dollars compared to April 2019, however May’s month-to-date average price in London is about $29,000 higher compared to all of May 2019.

WESTERN CANADA

Edmonton real estate continues to experience a significant hit to its local economy due to oil prices, and the biggest factor going forward will be employment, or lack thereof. The impacts of COVID-19 may result in a double-digit unemployment rate, which is expected to impact housing demand.

When it comes to selling prices, RE/MAX reported some lowball offers at $40,000, $60,000 and $80,000 below asking, however none of those deals went through. Since then, those properties have gone pending close to the asking price.

Moving forward, RE/MAX expects an average five-per-cent price decrease in Edmonton throughout the rest of the year. Edmonton saw prices fall two to three per cent in 2019, based on buyer demand. Edmonton has more millennials than baby boomers, which makes it a unique marketplace. Buyers wants new homes, which means many dated homes in older neighbourhoods aren’t moving, while infill and new construction in those neighbourhoods are in high demand. Furthermore, RE/MAX is reporting an influx in downsizers who are using COVID-19 as the catalyst to sell the big house and move into a condo or smaller home.

Multiple offers are common in Edmonton’s housing market, with houses selling for $20,000 to $30,000 over asking price. This is due to buyers shifting and adjusting needs. This could present a good opportunity for investors and house flippers to tackle some of those older, larger homes.

Lenders tightening up their lending policies is a concern for the Canadian real estate economy, and how they assess and react to buyers’ employment status will affect the buyer pool. This will dictate the market in the next year post COVID-19.

Calgary real estate is experiencing a double-edged sword, due to COVID-19 and the oil industry, and the greater concern is oil. It is still too early to accurately predict where prices will trend in the coming year. Housing supply has come down, which has kept prices relatively steady. RE/MAX reports some multiple offers on properties that are priced appropriately in the right neighbourhoods. Meanwhile, some properties have seen large price drops, but it’s unclear if that is related directly to the pandemic or if it is related to the overall economy.

Some regions in Calgary are experiencing drops, but others are doing well. A five-per-cent price correction is a more likely scenario. Some price adjustments are happening already, but an 18-per-cent price drop across the board isn’t realistic. But if by chance it did happen, prices would bounce back again. Higher-priced properties will be most affected, while properties at lower price points are expected to remain fairly stable.

Vancouver real estate is fluctuating from week to week, not just on seller side but also on agent side as well. People are re-emerging, with RE/MAX reporting lots of new inventory and many multiple offers, not just on $500,000 condos but those priced in the $2-3 million range as well. and. Perception is that now with easing of restrictions, people are more confident that things are moving in the right direction.

It’s possible to have high unemployment, yet a very strong real estate market. Unemployment appears to be having a greater impact on lower earners, and with the region’s high real estate prices, homebuyers are typically those in the higher income bracket.

Vancouver Realtors who were initially fearful are back in business, and an 18-per-cent decline in Vancouver housing values – or anything close to that – is highly unlikely. A five-per-cent price correction is more likely.

Historical data from the late 1990s show a financial crisis is often followed with a steep increase in housing prices. If real estate grows in a similar manner as the 2000s, safe haven assets like gold and potentially Bitcoin may follow.

The housing market is projected to see a steep sell-off in the second half of 2020. The U.S., Japan, South Korea, Singapore, and other hot markets are struggling with declining demand.

Highly-populated markets like Makati, Philippines, which saw housing prices spike to record high levels in recent years, are also expected to see a 15% to 20% drop in value by the year’s end.

The medium-term trend of the housing market remains gloomy. But, a study shows that the next correction will mark the start of a strong housing market recovery.

A research paper published by the University of Granada and Federal Reserve Bank of Chicago read:

“During the late 1990s and up to 2007 several countries experienced sharp increases in house prices. These episodes are usually mentioned among the causes of the recent world’s economic and financial turmoil. The dramatic growth in bank lending during this period has been broadly held responsible for these market dynamics.”

The housing market tends to see an extended surge after a financial crash for two main reasons.

One, interest rates remain low for a relatively long period of time. It alleviates pressure from potential buyers in a cheap market.

Second, various forms of stimulus and government support are rolled out to lead economic recovery. Such efforts typically lead to increased appetite for real estate purchases over time.

Over the next six months, the Federal Reserve does not intend to hold back in stimulating the economy.

Fed chair Jerome Powell predicts the unemployment rate in the U.S. to reach 25%, a level unseen since the Great Depression in the 1930s.

Amidst highly pessimistic economic projections, economists are putting on the pressure on the U.S. government.

Nobel laureate Joseph Stiglitz said earlier this week in an interview with Bloomberg that the lacking government support can become worrisome.

Stiglitz said:

“What worries me is that there won’t be enough government support, people will say we spent so much money to save the airlines, we don’t have enough money to shape the economy that we should have going forward.”

The pressure that is being imposed by both economists and the general population for more stimulus will push the Fed to provide the economy with enough liquidity.

Following arguably the biggest financial crisis in over a decade, the Fed’s aggressive stance will likely result in high levels of bank lending. That will stimulate the housing market entering 2021, setting it up for a strong decade ahead.

The well-documented correlation between gold and housing market, and the growing perception of Bitcoin as a store of value among institutional investors may indicate that housing, gold, and Bitcoin will perform strongly altogether over the long-term.

In a real estate environment of diminishing returns, like the one we’re experiencing in the GTA, it’s important that investors seek opportunities to diversify their portfolios. A reliably profitable way to achieve that diversification is through commercial investment.

The commercial real estate market is short on supply and long on demand, especially in niche pockets with unique product offerings that are hard to replicate. Residential densification is being encouraged to accommodate a growing population, which has resulted in increased demand for commercial space in landlocked business parks.

Choosing commercial real estate over residential provides several advantages. Commercial leases fall under contract law and therefore protect the landlord. There are no limits on rent increases. In addition to rent, tenants pay for taxes, maintenance and insurance. Tenants also pay for improvements to the space, which are often left behind to the benefit of the landlord. And if a tenant fails to pay what they owe after 15 days, it is lawful for the landlord to enter and repossess the premises. Try doing that with your basement suite.

Commercial’s current climate
Office and industrial sectors provide the best prospects in commercial real estate, both today and going forward, with current cap rates of 5% to 6%, strong demand, historically low vacancy rates, strained supply, and limited product in the pipeline. This creates a perfect storm for rent and price increases. Retail might be experiencing immense pressure, with the growth of online shopping forcing large chains to close their doors, but the industrial sector is prospering from this trend, with runaway demand for warehouse and fulfillment space from online retailers and e-commerce.

Industrial land transactions are at the lowest level since 1998 due to a restricted geographic ability to expand, which is in turn pushing prices up. At the time of writing, there were only 35 industrial units up to 1,500 square feet for sale or lease on the MLS in all of York Region and Toronto. Prices have risen steadily year over year and will continue to do so until supply increases or property becomes too expensive.

The industrial property availability rate (the amount of space available divided by the total inventory of space) in the GTA is currently 1.5%, and the vacancy rate is 0.4%. Both are all-time lows. The historic average availability rate is 5%. Based on these numbers, even if demand for space were zero, it would still take approximately five years to create enough space to return to the average, based on the current annual supply of 5.3 million square feet.

What to look for
To get started in commercial real estate, I suggest smaller industrial units of around 1,000 square feet. These can be purchased right now for approximately $250 to $300 per square foot with frontage/exposure to high-traffic roads in key locations. (Interior industrial units in the same buildings that lack this exposure can be picked up for around $200 to $250 per square foot.) Consider investing in several smaller units instead of one larger one.

Look for spaces with high-traffic exposure that allow for up to 80% to 100% office use. That kind of space will appeal to a wide variety of users, such as doctors, dentists and other highly paid professionals. Since office space commands a higher rent per square foot over industrial, office users will see lower rents and the potential for better exposure in industrial space.

Zoning and location are other key factors. A designation that appeals to a wide variety of uses is always more valuable. Ideal locations include those near major highways or public transit, with a loading dock and at least one drive-in dock that has 53’ trailer access. It should be freehold if possible. Clear height is also becoming increasingly important to tenants. Restricted industrial land supply users, especially e-commerce and fulfillment, will be looking to take advantage of vertical space.

An sample investment

Let’s take a look at the example of an 1,000-square-foot industrial space in Aurora, a key location with frontage/exposure on a high traffic road that can be used as office space.

With 30% down, this type of purchase would cash flow in the first year. These numbers can be scaled accordingly, from individual units to entire buildings.

After five years, this is a sustainable investment with increasing cash flow and strong fundamentals for capital appreciation. And historically, a 50% debt-to-equity ratio can weather the worst economic events.

Industrial property supply will continue to be constrained while outpaced demand persists, leading to increases in both rent and prices. The economy is strong, interest rates are low, and the unemployment rate is at 5.5%, a low not seen since the 1970s. Now is a great time to own commercial real estate.

Despite pandemic pressures, demand for multi-family assets continues to persist in Ontario and British Columbia, according to Canada Mortgage and Housing Corporation.

CMHC said that this helped compensate for the considerable slowdown in new home construction in March, which largely came about due to the economic impact of the COVID-19 pandemic.

Not taking into account Quebec, which resumed residential construction only in late April, the Canadian housing starts trend was 155,995 units during that month, up from 153,463 units in March.

CMHC data showed that Ontario represented the largest fraction of this volume with 93,628 starts in April, up by 42% month-over-month. BC came at a distant second with 27,767 starts, having fallen by 10% from March.

In stark contrast, Alberta’s rate of new home construction fell by 28%, although the province’s actual number of starts in April was at 23,262 units.

Still, the national starts trend could benefit from the current interest rate environment, at least for the time being.

Altus Group said recently that the Canadian central bank’s decision to cut short-term rates might prove a significant buffer against the worst effects of the coronavirus.

“The Bank of Canada [chopped] the target for the overnight rate by a cumulative full percentage point in one scheduled and one ‘emergency’ cut in less than 10 days. This has caused a drop in variable mortgage rates of about 70 basis points on average (for a 5-year term),” Altus Group said.

After a good showing in April, the team at BMO Economics is confident that home construction across Canada won’t see a major disruption due to the COVID-19 pandemic.

A report from the Canada Mortgage and Housing Corporation (CMHC) published late last week saw housing starts in April rise 11 percent over the same period last year despite the significant economic turbulence caused by the pandemic.

While starts still declined from March’s activity levels before the pandemic’s impact was fully felt, BMO Senior Economist Robert Kavcic called the home construction activity level “solid” amid shutdowns across many other sectors. Housing starts measure how many homes began construction during a given period and are generally viewed as a key factor in determining market health.

“Indeed, construction is one sector that appears to have skated through April with less damage than most, given softer restrictions and the ability to social distance on site,” wrote Kavcic in a research note.

With his relatively upbeat commentary, Kavcic joins fellow industry experts at TD and real estate consultancy Altus Group in predicting that home construction across the country would likely be less vulnerable to the disruptive effects of the pandemic than other sectors of the economy and even segments of the real estate industry.

Altus Group had published a projection last month that Canadian homebuilding would bounce back by July, but this was before the encouraging and prediction-defying April construction figures were published.

“One takeaway from this is that we’re not likely to see any material [housing] supply shortage coming out the other side, and the bigger risk for housing is that demand is more permanently depressed if the job market isn’t able to come back strongly,” wrote Kavcic.

The recession’s duration and the ultimate scale of the job loss caused by the virus are key questions economists have been grappling with when making predictions about the ability of the Canadian housing market to regain momentum after the worst effects of the pandemic have subsided.

Many in the industry, both in resale and new construction, are pinning their hopes on homebuyers sidelined during the crisis returning to the market in the late summer and fall, resulting in a late-year home sales rebound.

Those in the homebuilding industry have had plenty of reasons to celebrate so far this month with the better than expected housing starts data and the Ontario provincial government continuing to loosen restrictions on home construction activities.

But, as Kavcic pointed out, this is only one side of the supply and demand equation.