As discussed in our blog on supply, the impact of COVID on the supply of new construction condominium suites in the market will hit substantial lows not seen since the 2008-2009 housing crisis. This leads us to question what effects will be felt on the demand side. Will the market go down? Will buyers disappear? What will be the effect on new condo launches? The answers to these questions lie in the factors driving Toronto real estate: immigration, interest rates, and employment.
Immigration has long been one of the largest factors impacting demand in the housing market; especially in Toronto. The latest announcement from our neighbour down south is extremely favourable to the Canadian economy. Trump has said that he is temporarily suspending immigration to USA over concerns of the “invisible enemy”. Despite COVID-19, Canadian immigration remains open with no announcements of slowing down. Pre-pandemic Canada was predicted to welcome 341,000 immigrants in 2020, 351,000 in 2021 and 361,000 in 2022. Canada is ranked #1 best place to live, and with this temporary ban on immigration to the USA, we anticipate that Canada will see an even greater influx of immigration into the country attracting some of the best talent in the world. The key will be when Canada opens its borders again and allow for immigration back into the country. Various overseas websites including Juwai, an online platform for overseas Chinese buyers, are showing a spike in interest in Canada during their searches.
An influx of immigration will continue to stimulate demand, but what about affordability? With COVID-19, we are seeing record low bond yields. In fact, as of May 7, the 5-year bond yield hit an all time low of 0.41%. The last time we saw rates this low was February 2016. Many of you may be saying: what does this have to do with housing? The answer is quite simple: the 5-year bond yield directly impacts 5-year rates. In order to combat the economic halt brought by the pandemic, the Government of Canada is buying up bonds which drops yields and in turn drops interest rates. Essentially, increasing money supply in the market and decreasing the cost to borrow. Within the last 3 weeks, the big banks 5-year fixed mortgage rates are down ¼ point to 2.79%. As rates continue to drop, we will see a resurgence in sales as affordability starts to improve.
This pause in construction will contribute to a significant drop in released pre-construction units. In a year over year comparison of the number of released units in the first quarter, 2019 saw 4088 new units hit the market whereas 2020 only saw 2974. This represents a current 27.3% drop in available units on the market, and with the current situation as it stands, it is safe to assume the majority of project launches will be delayed into late fall 2020 or early 2021. This will lead to an approximate 60% drop in new suites released to market when compared to August 2019, which represents one of the largest reductions of pre-construction suites launched since the financial crisis in 2008-2009.
In a pandemic such as this, it is inevitable, albeit unfortunate, that there will be job losses. As of the end of March 1 million Canadians lost their job, and by the end of April another 2 million Canadians lost their job bringing the unemployment rate to 13%. While these numbers are staggering, it is important to look at how the Canadian Government is reacting to limit the economic blow from this pandemic. Billions of dollars of investment have gone towards preserving employment though the Canada Emergency Wage Subsidy (CEWS). By enacting a program like this, the government is aiming to not simply reduce the unemployment rates but rather to ensure that our supply chains are ready to go once the outbreak is considered over – flipping the switch of the economy back on at full force. The idea behind the policy is that keeping a well-trained motivated labour force on payroll will allow for a faster return to production once life returns to normal. Not only does this policy allow for less impact to these businesses, it can afford them a worldwide competitive advantage (and potential increased market share) at the expense of competitors that do not retain their labour force; which can bring an overall economic advantage to Canada once the pandemic passes. Our Canadian Government has enacted one of the most aggressive policies seen worldwide; the goal of which is to ensure our economy rebounds as fast as possible and that will undoubtedly contribute the demand in the housing market returning to its usual status. Coupling continually low interest rates with the government striving to keep job losses at a minimum and keeping our supply chains raring to go, pent-up demand for pre-construction units will generate strong sales starting this summer/fall and ramp up considerably into 2021.
Taking into consideration both supply and demand, it is clear that COVID-19 is going to cause a short-term dip in sales and supply to the market but leave prices relatively unchanged. As we are predicting demand will experience a short-term dip, but supply will be even further constricted, and when coupled with low interest rates it is the quintessential formula to see prices increases later in 2020 and much more so in 2021. As lives begin to return to “normal” and buyer confidence returns we will see these effects come to fruition.