Blog Summary: The Impact of COVID-19 on the Canadian Residential Housing Market
By Ben Myers, President, Bullpen Research & Consulting Inc. & Guy Tsror, Data Scientist, Local Logic
The global economy is in turmoil. Job losses are mounting and public health departments are pleading with the public to stay at home to curb the spread Covid-19. With so many people out of work, and so many others experiencing a decline in income, the last thing people are thinking about is purchasing a home. Those that work in the residential housing industry, current homeowners, and prospective home buyers are all wondering, what will happen with real estate prices? Is there a major crash coming? Will we see major mortgage defaults?
It is probably too early to make any data-driven or truly educated forecasts regarding the future of the Canadian housing market, however, we can look back at the last major public health crisis for potential clues.
Hong Kong was one of the regions hardest hit by SARS in 2003, suffering an 8% decrease in the average residential resale house price around the time of the outbreak. However, studies suggest that only a portion of the decline was attributable to SARS, as the territory was already going through a period of financial struggles in the years prior to the virus showing up.
More locally, Toronto was one of the most affected areas in Canada due to the outbreak of SARS, but the housing market did not decline. In fact, as the Financial Post recently reported, annual transactions increased by about 5.5% that year, and the average sales price increased as well.
Despite the points made above, COVID-19 appears to be much more serious and impactful than SARS was. If Hong Kong declined by 8% back then, is it reasonable to assume that Canadian house prices will drop by more than 10% now?
Early data from Local Logic can shed some light on how this pandemic is impacting interest in Canadian housing online. Local Logic products are used by approximately 80% of home buyers across Canada. Local Logic’s team of Real Estate experts, urban planners and data scientists continually analyze market trends on what future homeowners want, what inventory is available, and how those trends are changing over time by geographic area.
Spring is typically the most active time for home buyers and sellers, while January is usually pretty quiet. Using January as a baseline for comparison, we can see how strong or weak the current market is. In early April of 2020, the number of daily users on real estate portals in Canada declined by approximetly 10% compared to January 2020 (see Figure 1). Prior to COVID-19 making national news in early March, online activity was 45% above January. Last year at this time, daily user activity was nearly 60% greater than January 2019.
March 10th was the peak of market activity in Canada, and online visits have slowly declined since. However, on a provincial level, online real estate user activity has been fairly steady on major Canadian real estate portals in British Columbia, Alberta and Ontario (see Figure 2). It could be argued that the reason activity hasn’t fallen off is the additional time people have at home to search: they’re not commuting, they’re not going to movies or sporting events, and they have much more time on their hands.
Quebec has the highest number of confirmed COVID-19 cases in Canada, and has experienced a more drastic decrease in website traffic compared to the other major provinces, with a drop of more than 25% in distinct users.
Despite the drop in activity nationally, users are spending nearly 10% more time in each session, compared to January averages. However, despite this extra research, prospective home buyers are not contacting agents about listings as frequently as they did pre-pandemic. In late March and early April, major Canadian real estate portals experienced a drop in agent connections of nearly 35% month-over-month.
“The number of prospective home buyers looking at properties has declined, but the time spent per session looking at real estate has increased by 10%, suggesting that the buyers still looking are more serious, and are doing more online research given their inability to view the property in person.” – Ben Myers, Bullpen Research & Consulting Inc.
People doing online research may find the pictures of the properties inadequate and sellers likely feel they need to do more to attract buyers at this time. Not surprisingly, real estate portals are reporting an increase of between 200% and 500% in requests for virtual home tours.
The more bizarre finding, which is based on millions of searches over the past three months, is that users were searching for higher-priced properties starting late January, and that’s significantly increasing in March. Figure 3 presents data on the average minimum price filter used for a given day.
This behaviour can indicate that searchers are looking at a wider range of properties, but could also be an indication of more dreamers browsing for their ideal property, or looking at options that are normally not their first choice, since they cannot act on it at the moment regardless of its price.
Some real estate observers expected an increase in listings as desperate owners were forced to sell due to a lack of income, however the mortgage deferral program will help many homeowners with temporary cash-flow problems. In addition, a large number of investor suites that had been used solely for AirBnB purposes were expected to hit the market, but Local Logic data suggests that the daily number of newly listed properties are trending down (see Figure 4).
“Similar to the pattern of website visitors, there was a strong upward trend in property listings in early March, followed by a sharp decline as the COVID-19 crisis worsened. It appears that home-sellers are waiting out the crisis, rather than posting their properties for sale in softer market conditions.” – Pierre A. Calzadilla, Local Logic
In conclusion, interest in purchasing real estate has dropped off over the last couple of weeks, but prospective home buyers still using real estate portals in Canada are spending more time doing research.
Transactions should drop significantly as potential buyers can’t easily view the units, and most are not comfortable with buying off pictures alone. Secondly, transactions will decline because listings are declining, and there is less inventory available to purchase. Thirdly, buyers are just not reaching out to agents, with data showing a 35% monthly decline in buyer-agent connections.
Local Logic data shows that despite the drop in demand AND supply, listing prices are still trending up, suggesting sellers are not expecting prices to drop. Sellers are clearly willing to spend on virtual tours to better market their properties, and we expect that buyers are going to wait for an acceptable offer before selling at a price way below market.
While there currently are no indications that prices will go down in the long run, this could happen as an indirect result of the economic crisis induced by the pandemic. Many potential sellers and buyers might indeed face income loss, and wealth deterioration as time passes.
Finally, the government response to the crisis has been rapid, with financial support and lower interest rates, and as such, Bullpen Consulting and expects the decline in average resale prices on a national level in 2020 to be in single-digits, avoiding a housing crash. BUT, the data is changing daily, and we will continue to look at available figures and adjust that forecast accordingly.
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