Over decades, real estate has become an increasingly big slice of the economy, taking the mantle of Canada’s largest industry in the 2008-2009 recession as low rates fuelled a lengthy boom period. The pandemic put that trend on steroids.
Before the COVID-19 health crisis, residential investment routinely amounted to 7 per cent of nominal gross domestic product. More recently, that’s surged to more than 10 per cent – or roughly double the equivalent rate in the United States. Stuck at home in the pandemic, people spent big on new properties and renovations, with help from rock-bottom interest rates that were critical to the crisis response.
In a sense, the exuberance for real estate was a bright spot in the darkest days of the pandemic recession, a slight offset to devastation in other parts of the economy. Now, things are shifting. As housing activity cools, the industry has become a drag on an economy that increasingly relies on it.
That was apparent last Tuesday, when Canada posted a shock economic contraction for the second quarter. The key driver was sluggish exports, but housing also had a negative impact. Residential investment fell 3.3 per cent, or at a 12.4-per-cent annualized rate. And further drops are likely coming, given that sales are continuing to ebb in major markets across the country.
Residential investment “is now such a large slice of GDP … that it’s likely to act as a drag for some time,” Sal Guatieri, senior economist at Bank of Montreal, said in a note to clients. “Towering nearly 21 per cent above late 2019 levels, the sector is poised to contract in the year ahead as sales moderate in response to fading affordability and as activity corrects from the stratosphere.”
Residential investment is comprised of three areas: ownership transfer costs, new construction and renovations. Transfer costs include such things as real estate commissions and land transfer taxes, and it was this area that entirely drove home investment lower in the second quarter.
New construction and renovations actually managed to increase. At 4.3 per cent of nominal GDP, construction is roughly double its level in the late 1990s, but short of peaks in the mid-1970s. That’s presumably an area in which people would like to see continued growth, owing to housing shortages.
Where there’s scope for a decline is renovations, said Stephen Brown, senior Canada economist at Capital Economics. The pandemic is rife with stories of people rebuilding their decks with pricey lumber, or investing in better home offices. Now, some people are returning to workplaces and spending on activities that were off-limits in lockdowns. “Maybe spending on renovations is going to decline as spending on services picks up,” Mr. Brown said.
Beyond the GDP numbers, the price of homes has accelerated greatly in the pandemic, making it tougher to break into the ranks of homeowners. The national average sale price of $662,000 in July was up 16 per cent from a year ago. For housing skeptics, the national obsession with real estate is a sign of misplaced priorities; that resources could be better allocated to things that enhance our productivity and living standards.
Instead, Canadians have doubled down on mortgage debt in the pandemic, bolstering age-old concerns over the financial health of consumers. In Tuesday’s GDP report, Statistics Canada noted that households added $84.2-billion in mortgages over the first half of 2021, versus $62.3-billion in the second half of 2020. In June, mortgage debt accelerated at the quickest annual pace since 2008.
Housing troubles were a topic of conversation on Royal Bank of Canada’s earnings call in late August. Chief executive Dave McKay said he worried about the bank’s ability to recruit workers with home prices so lofty in major markets. But his concerns ran deeper than that.
“Where I do worry … is the more cash flow that consumers are putting into housing stock, the less is available to drive the economy,” he said. “I think all policy-makers are worried partly … about long-term economic drag from that much cash flow going into servicing housing.”
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Buying and selling a house in midst of the COVID-19 pandemic was, for Denise Craine and her husband, an exercise in adapting to viewing rules that changed from one house to another.
”Every house had a sign that said ‘sanitize before you enter, do not open cupboards, do not use the washroom, no children allowed, no more than two people allowed plus your agent,’ ” recalls Ms. Craine, who runs a Toronto-based association management firm called Secretariat Central. “But then there were two houses that also had gloves in the entrance, and I remember (my husband) telling me later ‘I think we were supposed to wear those.’
“For viewings in their home, Ms. Craine and her husband added their own twist to pandemic protocols: all cupboard doors and drawers were left open to further dissuade touching and visitors were encouraged to disinfect as they went along, with bottles of disinfectant distributed throughout the house.
”So if they really wanted to inspect something, they could clean that surface before and after they touched it,” says Ms. Craine.
As the country’s vaccination rates continue to edge higher and there’s hope that COVID-19 will ease in the months ahead, a question for the real estate industry is what pandemic practices it should hang on to and what can go safely by the wayside.
George Filntissis, Toronto realtor with The Condo Kings – a Royal LePage Terrequity broker – thinks most of the safety practices that were either mandated or strongly recommended because of COVID are here to stay. As far as he’s concerned, that would be a good thing.
”I think that continuing to do things like wearing masks and social distancing would still make sense in the long run because we now know that they help keep us from getting sick,” he says. “I see a lot of people in my work and pre-pandemic it couldn’t be helped that if you met with someone who had a cold, you’re also going to get sick. Handshaking was constant so at some point you were going to catch something.
”Beyond the safety aspect, many of the current real estate practices that were either introduced or accelerated during COVID-19 have also led to greater efficiencies and convenience for realtors and their clients, says Mr. Filntissis.
For example, virtual viewings – which have been around in real estate for some time – have made it easier for prospective buyers to decide whether or not a place is worth visiting.
Shorter appointments, which became the norm during COVID to allow for sanitizing between showings, have shown to be just as sufficient as the typical pre-pandemic one-hour visits.
”Now it’s 15 to 30 minutes which, quite frankly, is more than enough time for most people to look through a place and ask questions,” says Mr. Filntissis.
A minor change with major impact has been the switch from purchasers picking up the keys to their new abode from their lawyer’s office to simply taking it out of the lockbox on the property.
”That is not going away,” says Mr. Filntissis. “It’s very logical, it’s very efficient.”
Courtney Cooper, president of Proptech Collective – a Toronto-based group that connects real estate professionals, technology entrepreneurs and city builders – foresees technology being integrated into more parts of the buying and selling process in real estate.
She points to digital documents and signatures, which allow all parties to sign and seal the deal virtually, as an example of technology that took off during the pandemic and will likely become part of standard practice after.
Digital mortgage platforms such as Homewise and Nesto, which help homebuyers find the best mortgage rates, will also be in greater demand post-pandemic, predicts Ms. Cooper, because they eliminate the hassle – and safety risk – of having to go to a bank to negotiate and sign a mortgage contract.
”I think we’re also going to start to see platforms that tie it all together so you can just go to one place to find and share listings, collaborate with your realtor, get a mortgage, sign the deal and transfer the deed,” says Ms. Cooper. “Right now you need to deal witheach person and company individually but over time all these parties will be more interconnected, and information that you’re providing to different parties today will be moved seamlessly.”
Virtual tours, whether offered as a 3D rendering of a space or through a video conference with a realtor, will also remain a regular part of what homebuyers can expect.
”We might even start to see self-touring here, like they do in the United States,” says Ms. Cooper. “We’ve been seeing more digital connected locks in the U.S., so access is automated, and people can come in using a passcode that’s set to work during a specific time.
”Some of these self-tours are augmented with smartphone audio tours that viewers can listen to as they walk through a property, says Ms. Cooper.
Virtual staging, which designs spaces using digital software that adds 3D furniture and, in some cases, even shows a property’s renovation potential by taking out walls or adding a swimming pool in the backyard, has been another winning technology during the pandemic.
Ibtisem Hamani, owner of Home Magic Touch Inc., a Toronto company that offers traditional and virtual staging services, says the latter accounted for about 10 per cent of sales before the pandemic.
“Then COVID hit, and it was unbelievable the number of orders we had for virtual staging,” she recalls. “The impact on our traditional staging business was immense – the split between our two businesses actually flipped, with virtual staging accounting for 90 per cent and traditional staging 10 per cent.”
In addition to the reduced risk and convenience of being able to show a home at its spiffed-up best on a digital platform, virtual staging offers significant cost-savings – less than $100 for one image versus between $2,000 to $3,000 for traditional staging, where rented furniture is trucked in, and a home is decorated professionally.
”We approach virtual staging like we do traditional staging – it’s all about the proper design and layout,” says Cos Pina, director of marketing at Home Magic Touch. “But the difference is that with virtual staging we have access to more than 3,000 pieces of 3D furniture.”
Ms. Hamani and Mr. Pina say they expect virtual staging to become even more popular in the post-pandemic future. They’re already planning to build on its success with an offering of augmented reality, where online viewers use virtual reality glasses for immersive walk-throughs of properties for sale.
While most home buyers and sellers seem to have embraced – or at least accepted – today’s COVID-driven protocols and processes in real estate, there are some practices that will likely not be missed after the pandemic is over.
Ms. Craine cites one example: when she was shopping around for home insurance, one insurer told her it would send over a property assessor who would inspect the house first-hand only from the outside. Ms. Craine and her husband would need to take the assessor on a virtual tour of their home’s interior.
”We would have to get on our phones and the assessor would direct us to parts of the house that he would want to see virtually,” recalls Ms. Craine. “I didn’t want to have to do that, so in the end we went with someone else.”
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