How the coronavirus might impact Canada’s housing market

Businesses all over the world are becoming increasingly concerned about the coronavirus’s impact on various markets as the death count and number of affected individuals mounts.

Could the coronavirus adversely impact property markets in China and beyond? The answer mostly depends on how quickly the virus is prevented from spreading within China and elsewhere. In the meantime, the uncertainty about the potential for contagion is keeping chief risk officers awake at night.

The current outbreak is caused by a new strain in the family of viruses characterized as coronavirus, but a similar epidemic in 2003 caused by Severe Acute Respiratory Syndrome (SARS) impacted Hong Kong and many other countries, including Canada.

Toronto was one of the first places in Canada to experience SARS-related emergencies. Health officials implemented strict protocols to prevent the virus from spreading. Even handshakes were discouraged. During the 2003 convocation ceremonies at the University of Toronto, the traditional handshake with the school’s president was replaced with a gentle head bow.

Earlier precautionary measures to contain the virus discouraged discretionary travel and face-to-face interactions. Generally, a slowdown in market activity is likely when consumers avoid grocery stores, hair salons and/or restaurants, but is it significant enough to cause a decline in economic output, including property markets?

Despite the challenges resulting from SARS, the Canadian economy did not necessarily experience a slowdown in 2003. Canadian GDP grew to $892 billion in 2003 from $758 billion in 2002, and it ultimately crossed the trillion-dollar threshold in 2004.

Hong Kong, the epicentre of the 2003 SARS epidemic, experienced a slight slowdown, with GDP declining to US$161 billion in 2003 from US$166 billion a year earlier. The Hong Kong economy, though, had not been growing since 1997 when GDP reached US$177 billion. Hence, the slowdown in 2003, even if meaningful, could not be entirely attributed to SARS.

Even neighbouring China’s economy grew, to US$1.6 trillion in 2003 from US$1.3 trillion in 2002. Chinese economic growth, however, took off in 2006, with record year-over-year GDP growth that has lasted for more than a decade.

As for property markets, recall that Toronto bore the brunt of SARS in Canada. If anyone was expecting a slowdown in housing sales or moderation in housing prices, they might look at a city where handshakes were almost forbidden.

Interestingly, housing sales data from 2003 in Toronto show no apparent signs of suffering. Sales increased to 78,898 units in 2003 from 74,759 units in 2002. Similarly, the average sale price increased by around $18,000 during the same time period. Essentially, the growth in sales and prices in 2003 was in-line with long-term trends.

The numbers above raise two related questions: Did SARS, despite the enormous death toll and the cost of the resources mobilized to contain the threat, have a limited economic impact elsewhere as well? And can one draw any inferences from SARS for what property markets may experience from coronavirus?

The housing market dynamics in 2003 in Hong Kong offer some context. The SARS epidemic claimed the lives of 300 Hong Kong residents, representing a third of all SARS-related deaths worldwide. Grace Wong Bucchianeri, a former professor at Wharton, reported in the Journal of Urban Economics in 2008 that housing prices in Hong Kong fell by eight per cent, equivalent to a total value of US$28 billion.

This raises the question of whether the decline in Hong Kong housing prices in 2003 resulted entirely from SARS or was it an acceleration of the lingering “pre-SARS downward trend.” Controlling for the “already frail Hong Kong housing market,” Bucchianeri observed a moderate average price decline of 2.6 per cent that could be attributed to SARS.

Coronavirus to date has already claimed more lives than SARS did in 2003. The uncertainty about how long the threat will last and how quickly it can be contained will weigh heavily on the markets. Since the epicentre of the breakout is far from Canada, it is probable that the adverse impacts on Canadian markets will be moderate at worst.

Evidence from Toronto in 2003 suggests that the housing markets in Canada did not experience a noticeable adverse impact from SARS. The effect of coronavirus, if any, is likely to be moderate in the short run. If the challenge persists over a more extended period, Canadian housing markets are likely to become even more attractive to investors who would like to move their capital from markets with ominous health risks to the relatively safe environs in Canada.

Financial Post