Major condo price correction is unlikely despite collapsing demand: BMO

While there’s no doubt that downtown condos were left in the dust when suburban single-family home sales and prices took off during Canada’s economic recovery, the chances that urban high-rises will see a significant price drop over the next year is unlikely.

In his response to November housing market data published this month by the Canadian Real Estate Association, BMO Senior Economist Robert Kavcic acknowledged that urban markets “are highly out of favour right now” with homebuyers.

But even as the price gap between condos and single-detached homes is likely to widen in the new year, condo markets in major cities, including Toronto, Montreal and Vancouver, should eventually find their footing, Kavcic wrote in a research note published last week.

“Will we see a deep correction? Probably not. The ‘death of the city’ thesis is probably excessive,” he wrote.

That said, the economist believes there will be some condo “overhang” — in other words, excess supply — to work through before the hard hit downtown markets in Canada’s largest cities can regain their strength. Strong rent price appreciation and a robust short-term rental market that fed investor enthusiasm for urban condo in these cities is also unlikely to return any time soon, despite the positive developments on the vaccine front.

After a barn-burning year for rural and vacation property demand, Kavcic sees these markets remaining “extremely tight” into early 2021, meaning price growth will continue for the time being.

What remains to be seen is how demand will change 2021’s second half on the realistic assumption that vaccine distribution will permit many aspects of city life to resume. Kavcic said that activity may plateau in those farther flung markets that have seen their appeal rise during the pandemic.

Price declines are also in the cards later in the year and into 2022, though the economist believes these markets will retain some of the pandemic-driven boost in property values.