COVID-19: Will Canadian house prices fall?

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Ruth Saldanha: Even as we battle unknowns in the economy through the coronavirus, increased unemployment or the looming possibility of a recession, one thing that Canadians have always had in their corner is rising real estate prices. But will this investment pot of gold stay shiny this time around? John Pasalis, President of Realosophy, is here today to talk about what could potentially happen to Canadian real estate.

John, thank you so much for being with us today in our virtual office.

John Pasalis: Good to be here.

Saldanha: Well, it's hard to avoid comparisons of our current economic situation to 2008. Now, the 2008 crisis was caused in part by overleveraged mortgages and Canada currently has really high levels of household debt. From a real estate standpoint, is this a fair comparison to make?

Pasalis: I mean, there's certainly some comparisons, but it's quite different. I mean, we can't really compare what's going on economically now. It's, of course, completely different. I mean, there are – it's interesting to compare because there are far more negative things going on. Obviously, the job losses are quite more significant. But when we look at Canada, there's a lot more stimulus and support, CMHC and even the banks supporting homeowners if they can't pay their mortgage for six months. So, there are a lot of completely different things going on. And it's really – it's very hard to even understand or try to predict where things will be even two months from now.

Saldanha: Exactly. Because up until three or four weeks ago, both prices and demand for real estate, both in Toronto and in Vancouver, was sky high. But now with lockdowns in several of these cities underway, do you think that there's a chance for a much-needed correction or price stability?

Pasalis: Yeah, I mean, that's a great question. I mean, I think at a minimum we're going to see some price stability. So, what's been happening in the past few weeks even since we've seen a bit of a lockdown from the governments as a result of COVID-19 is that Toronto's housing market has still been booming. I mean, there's still been bidding wars, sales are still up over last year, prices are still up over last year. But this is really just because our starting point was a market that was really, really very competitive. And what we're finding now is that the momentum is slowing. We went from a market that had 15 offers on homes to last week there were 10, this week there's 5 and we're starting to see fewer, fewer bidding wars on homes. So, the momentum is cooling. We're probably going to see prices level off.

It's hard to say if we're going to see downward pressure on prices. Again, the one thing that makes this very different from even 2017 when Toronto, when the GTA had a crash and in the financial crisis, is that, yes, we're probably going to see sales pull back, but we're also likely to see new listings decline. And again, a lot of that is because a lot of sellers if they don't need to sell, don't want to sell, they don't want people in their homes. And even the provincial government and the real estate associations are really stressing and encouraging people not to list their homes if they don't need to. So, these dynamics are a little bit difficult to kind of understand how that's going to impact, because normally to see downward pressure, you need a bit of a combination of both a surge in listings and a big drop in demand and we're not going to probably see a big surge in listings.

Saldanha: So, let's talk about people who are forced to sell right now. A lot of investors in real estate in Canada rely on either rental income or income from things like Airbnbs. Now, with demand falling across especially Airbnbs, what are some of the options, especially for people who are forced to sell?

Pasalis: It's going to be very – so, people who are forced to sell now, I mean, of course, are listing their properties on the market as soon as possible, aren't delaying. The challenge is going to be for the investors, and I think that's kind of what everyone has been talking about. I mean, if you have two or three rental condos, there's a lot of talk now in the press about tenants going on a rental strike and not paying their rents. And legitimately, I mean, if their incomes have been cut, they can't pay their rent, and the province are basically saying tenants are not going to get evicted during this short period. So, if you're an investor and you're not collecting rents, it's of course going to be hard for those investors.

Now, selling is also going to be difficult and not necessarily an easy path out. Because I mean, number one, it's going to be very hard to show rental properties during this crisis. A lot of tenants are going to say no. They could say I'm under quarantine, or they could say I'm very vulnerable, It's going to make it very difficult to sell those properties. And then, on the flip side, we're going to have a lot of investors who are going to be reluctant to assume those tenants. If that tenant is two, three months in arrears already, which would have to be kind of disclosed, do you really want to be buying that investment property? So, there's no easy way out for investors right now.

Saldanha: I'd also like to talk about demand. Now, a significant portion of Canada's rental demand at least comes from high amounts of immigration. With this being such a global virus, do you see there being any impact on demand, especially immigration-led rental demand in Toronto real estate?

Pasalis: Yeah, for sure. I mean, we're going to see a – I mean, we're going to definitely see a dip in demand from new immigration over the next little while. But the reality is – I mean, Toronto's rental market and housing market was so out of balance, where demand for rentals and for houses significantly exceeded the supply, it shouldn't have a huge impact. Now, we're probably going to see some downward pressure on rents just as a result of everything that's going on right now. But I do think certainly the decline in immigration is going to help – if nothing else, at least balance out the market in the next year or so.

Saldanha: Finally, for investors, what's a good thing to do right now? Does it make sense for new investors in real estate to hold, or should they actually try and look for good deals or pockets of value right now?

Pasalis: So, there's no real deals or pockets of value yet. I mean, the prices are still high and prices even this month are probably going to end up being 15% higher than they were last year. So, there's no real drop in prices. So, there's no bargain hunting yet. I mean, if buyers and investors want to wait, that's one thing. If you're an owner of investment properties, I mean, again, you're in a bit of a tough line. Probably your best strategy in the short term is to sit tight, because it's going to be a really tough, tough markets to be selling in. I mean, you might be just better off wait for a little bit more stability in six months. And then, at that time, if you decide to sell, I mean, it's going to be anyone's guess where prices will be, but hopefully, we have a bit of a stable cooldown in the market and not anything too drastic.

Saldanha: Thank you so much for joining us today, John.

Pasalis: My pleasure.

Saldanha: For Morningstar, I'm Ruth Saldanha.