Canadian real estate remains resilient

Ruth Saldanha: You couldn't have missed the headlines last week when the Toronto Regional Real Estate Board reported that home sales in the Greater Toronto area fell close to 70% because of the COVID-19 pandemic. Meanwhile, in Vancouver, the fall was around 40%. Though these numbers may sound dramatic, the fact is that prices on average went up, albeit by not too much. In Toronto, the average selling price was up 0.1% from last year while Vancouver prices were up around 2.5%. John Pasalis, President of Realosophy, is here today to talk about the market and what sellers and investors can do right now.

John, thank you so much for being here today.

John Pasalis: Thanks for having me.

Saldanha: Home sales in Toronto, for instance, are down close to 70%. Is this as bad as it gets in terms of sales?

Pasalis: It's probably the steepest decline in sales we're going to see. I mean, of course, this is huge. This was sort of the peak period when everyone was social distancing and putting their searches on hold. So, I do suspect we're going to start to see a bit of a recovery in terms of demand over the next few months certainly.

Saldanha: What about prices? Is this more a buyer or a seller's market right now?

Pasalis: You know, that's the interesting thing, prices have remained relatively stable. And again, a lot of this has to do with the fact that there has been a steep decline in new listings. So, the inventory on the market has also dropped which has actually kept prices quite stable right now. So, it's probably close to a balanced market if not actually leaning still towards a bit of a seller's market. There are still multiple offers in Toronto. People are still holding back offers. So, it's still pretty competitive. And again, because there was still a lot of demand in the market, and again, a few people did stay in the market as buyers. But just the lack of supply has kind of really kept the market pretty tight still.

Saldanha: You noted that in downtown Toronto at least rentals have somewhat fallen. What's likely next from a rental standpoint?

Pasalis: So, it's a good question. I mean, what we've been finding certainly is that the last month was certainly the first month in a while that we've seen a year-over-year decline in average rents. And a lot of this has to do with strong pull back in terms of demand. Renters probably were hardest hit with this slowdown. So, we are seeing a big decline in demand. Listings have been relatively balanced. I'd say they didn't drop as much as resale home listings fell. So, rental listings were still relatively balanced. And that's kind of what resulted in a bit of an oversupply in the market in the short term which has put downward pressure on rents. Now, going into the rest of the year, we're probably going to see that trend continue. There's quite a few condo completions in the pipeline. And when you couple that with probably a decline in immigration in the GTA, a decline in unemployment which tends to put upward pressure on vacancies, all of this is probably going to put a little bit of downward pressure on rents leading into the rest of the year.

Saldanha: Well, in which case, does this mean that there are any opportunities to be had from an investing standpoint and if so, where are they?

Pasalis: So, investing, I mean, not quite yet because prices are still relatively elevated for investors. I mean, even if you are buying resale condominiums, the cap rates are still quite low. So, probably as an investor your best strategy is to hold on to cash and wait to see if there is downward pressure on prices. And the real test will really be over the next 6 to 12 months and that's if I'm an investor, I'd be waiting for that because that's when we're going to see mortgage deferrals come to an end, we're going to see how many jobs actually are still there after businesses open up and we're going to see potentially what pressure, if anything, any remaining unemployment is going to have on home prices in that sort of period. So, that's kind of the key period we're going to be keeping an eye on.

Saldanha: Finally, what are some signs to watch for in terms of a recovery in uptick of sales?

Pasalis: So, in terms of a recovery, I mean, we're not quite there where we're keeping an eye on the recovery yet because we're still sort of keeping an eye on a potential decline, right? And that's kind of what we're most concerned about yet. I mean, what's happened right now has just been this sort of short-term exogenous shock to the market that has pushed both demand and sales down, but we haven't really seen the effects of the potential recessionary effects on the housing market yet. So, we're not quite there where we've really absorbed those changes. And until we have, then we're not really looking for recovery. We're keeping an eye on what, if any, indicators are that we might see some downward pressure on prices, and those types of things will be not just a decline in sales because I think the GTA can handle a decline in sales. I mean, the market was so competitive to begin with. I mean, even if 50% of buyers walked out of the market, we'd probably still have a competitive market. The real test is going to be, like I said, it's on the supply side. If we have homeowners who are constrained by high debt, feeling stressed financially from unemployment and need to sell their homes, it's the combination of both that are the key things we're going to be looking at that might impact the housing market over the next year or so.

Saldanha: Thank you so much for joining us with your perspectives, John.

Pasalis: Thanks for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.