RBC Economics sees nothing to indicate that home prices will fall anytime soon.
It’s the opposite instead.
“We see little that can stop the appreciation in property values near term,” RBC economist Robert Hogue wrote in a market update.
Hogue’s paper came out on the day the Canadian Real Estate Association (CREA) reported that July 2020 home sales posted the highest record in history.
“If anything, many markets are likely to experience further [price] acceleration,” Hogue wrote.
The Canadian real estate market dipped in April this year, amid the lockdowns and economic impacts brought about by COVID-19.
Although the pandemic stopped what was predicted to be a strong spring 2020 market, transactions started to pick up around May and June.
As Hogue wrote, COVID-19 “did not destroy this year’s spring market—it mostly delayed it”.
The CREA reported on Tuesday (August 17) that 62,355 home sales happened in July 2020, marking the “highest monthly sales figure on record going back more than 40 years”.
The price of a typical home in Canada rose 7.4 percent year-over-year last month, the “biggest gain since late 2017”.
Meanwhile, the national average price for homes sold in July 2020 posted a “record $571,500, up 14.3% from the same month last year”.
In B.C.’s Lower Mainland, the Real Estate Board of Greater Vancouver reported earlier that the price of a typical home increased to $1,031,400 in July this year.
The price represents a 4.5 percent increase over July 2019. It is also 0.6 percent higher compared to June 2020.
In his August 17 market update, Hogue noted that supply and demand conditions “got a lot tighter Canada-wide” last month.
“There is nothing to indicate any imminent slump in prices,” the economist wrote.
“On the contrary, super tight conditions in Halifax, Montreal, Ottawa, most of southern Ontario, Winnipeg and Victoria, if sustained, are likely to lead to a further price acceleration in the near term,” Hogue continued.
According to Hogue, “there’s still pent-up demand left to satisfy”.
“This is poised to keep the market humming in August and possibly September,” the RBC economist predicted.
Hogue noted that the sales-to-new listings ratio jumped to 0.74 Canada-wide in July, the “highest it’s been in 18 years”.
“If sustained at this level, it would signal intense upward pressure on prices,” he wrote.
On June 4, 2020, Canada Mortgage and Housing Corporation predicted a nine to 18 percent decline in average home prices over the next year.
A few weeks later, on June 23, the CMHC released its outlook report for the summer market, and again stated that home prices will drop.
“House prices will likely fall because of uncertainty over the economy’s path,” CMHC declared about the prospect in major urban centres in the country.
RBC’s Hogue qualified in his August 17 update that the market may see a “cooling effect on prices—most likely by the early stages of 2021”.
“We expect lower immigration and increased condo supply in core urban areas to concentrate any weakness on the high-rise condo segment,” Hogue wrote.
Hogue added that other segments of the real estate market could also “come under downward pressure if the pandemic worsens or the economic recovery runs into trouble”.
In a June 15, 2020, Hogue indicated that benchmark prices of homes in Canada are forecast to fall seven percent by the middle of 2021.
This Week’s Top Stories: Canadian Real Estate Prices Forecasted To Fall, As Households Make Fewer Payments – Better Dwelling
Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
One of the world’s largest credit rating agencies confirmed an early forecast of falling home prices in Canada. Moody’s had expected government measures would delay any impact to home prices. The firm believes this is still true, and even elaborated on which markets will be hit. They expect enthusiasm over stimulus measures will begin to wear thin. At this point, the reality of a damaged labour market, and how meaningful improvements have been will start to hit sellers. This is expected to be stronger in some markets, like Toronto, than other markets – like Vancouver.
Despite booming Canadian real estate sales, condo apartment prices have now fallen from their peak price. The aggregate benchmark reached $478,700 in August, up 6.45% from last year. This number is down 0.15% from the all time record reached in April. As you might expect, not everywhere is falling. Three markets have printed new all-time highs as of August. The rest however, have fallen – and some markets haven’t seen an all-time high in over half a decade.
Canada’s national housing agency, and state-owned insurer, sees a lot of risk in real estate markets. Seven markets are now flagged as having “moderate” levels of vulnerability, up from five in the spring. Toronto and Vancouver remain in the moderate category, while Montreal continues to be considered low risk. The organization did say things appear better than the reality, due to disposable income temporarily being inflated by government support. Once disposable income falls back to non-supported levels, overvaluation metrics should rise once again.
Canada’s biggest real estate markets are seeing one of their fundamental drivers continue to deteriorate – immigration. Toronto only saw 4,450 permanent residents arrive in July, down 64.0% from last year. Vancouver saw 1,300 people, down 71.1% from last year. Montreal fell to 2,110, down 47.2% from last year. Toronto and Vancouver have seen the declines become larger from the month before. Montreal bucked the trend by seeing a smaller decline, but has also seen a much longer trend that goes back before the pandemic.
Canadian mortgage debt is swelling, but households are making a lot fewer payments. The amount paid towards mortgages hit $90.27 billion in Q2 2020, down 3.32% lower than last year. Almost all of this is due to paying off less interest. Breaking the numbers down, we see payments towards principal are on the decline, while payments towards interest are actually rising.
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Office real estate market will get back to pre-Covid level, in 2025: Cushman & Wakefield – CNBC
The coronavirus remote work experiment will become a permanent trend, but at some point, employees will return to the office in numbers that match the past. When? It could take five years, according to a new forecast from Cushman & Wakefield.
Global office vacancies will not return to their pre-Covid peak levels until 2025 and, in all, a net 215 million square feet of office vacancy will have been lost due to the pandemic, according to the outlook from one of the largest real estate services firms in the world. Between Q2 2020, when Covid-19 hit the U.S., and Q3 2021, the net negative office square feet damage will reach 95 million square feet, roughly 10 million square feet more than the financial crisis trough.
The situation will be the worst in the West. During the financial crisis, Canada, Europe and the U.S. recorded a combined loss of 120.5 million of square feet occupancy from peak-to-trough. Including Q2 2020, that will reach over 200 million square feet of “negative absorption” peak-to-trough in the Covid recession, according to Cushman & Wakefield’s analysis.
Work from home is ‘very real’
“We know this work from home trend is very real,” Kevin Thorpe, the firm’s chief economist, recently told CNBC.
For the study, Cushman & Wakefield surveyed some of largest companies around the world about the future of the office, and attempted to measure both the cyclical impacts of the Covid recession and structural impacts assuming a higher increase in work from home.
Thorpe said two key findings emerged. First, office leasing fundamentals will be significantly impacted and vacancies reach an all-time high. But the second find is more encouraging: the office real estate market will fully recover, according to Cushman & Wakefield, largely due to employment growth and the ongoing shift in the U.S. economy’s concentration in certain types of professional jobs.
In all, the real estate firm estimates that 82% of the damage will be related to cyclical factors: permanent office job losses and the rise of coworking, while 18% is related to structural factors: primarily assumptions about permanent remote workers and hybrid workers — those who work remotely some of the time.
Work from home will double, and hybrid workers will increase. The study estimates that the share of people working permanently from home in the U.S. and Europe will increase from roughly 5-6% pre-Covid-19 to between 10% and 11% post-Covid, while the share of hybrid — also referred to as agile workers — will increase from between 32% to 36% to just under half of all workers.
Levi Strauss & Co. CFO Harmit Singh recently told a CNBC @Work virtual event that it pulled the plug on any new commercial real estate during the crisis. “The myth that work from home is not productive has been busted,” the Levi Strauss CFO said. “I believe we will settle into a culture where working from anywhere will be the new norm, with work from home or office or a hybrid arrangement.”
Google recently announced it will try a hybrid model of work as most of its employees do not want to be in the office every day.
Many younger workers are taking advantage of the Covid remote working shift to travel, embracing a “digital nomadic” lifestyle, a shift which could become permanent for a new generation of labor.
Over time, as economy shifts to a knowledge-based, professional services economy, it will offset the flexible workforce trend, Cushman & Wakefield’s study concludes. “But in the near-term, there will be significant challenges for the office sector,” Thorpe said.
Many workers still do not feel safe enough to return to office. One study found that only 14% of workers said that they trust their CEOs and senior managers to safely lead them back to work.
Global office vacancy will rise from 10.9% pre-Covid crisis to 15.6% by Q2 2022, the study forecasts.
Some of the largest companies in the world have been expanding office space in major cities, such as New York, during the crisis.
Facebook, which has been acquiring New York real estate for years, agreed last month to a major lease at the old James A. Farley post office building in Manhattan. Amazon has also purchased the Lord & Taylor building on 5th Avenue, and that is even though Facebook CEO Mark Zuckerberg has said as much as half of the company’s workers may be remote in the future. In March, just as the Covid crisis hit the U.S., Amazon paid over $1 billion to acquire tha Lord & Taylor building in New York, which includes over 600,000 square feet of space.
Appraisal data shows scale of value destruction in US real estate – Financial Times
Commercial properties hit by the economic effects of coronavirus could have lost as much as one-quarter of their value or more, laying bare the scale of the damage being wrought across American malls, hotels and other commercial buildings.
Evidence emerging in the commercial mortgage-backed securities (CMBS) market from recent appraisals also raises questions over the value of the collateral backing commercial mortgages throughout the financial system.
Properties that have gotten into trouble are being written down by 27 per cent on average, data from Wells Fargo shows. New appraisals are triggered when a commercial property owner starts to have trouble paying the mortgage, and the loan is handed to a “special servicer” that could eventually seize the property on behalf of CMBS holders.
“It’s a big number,” said Lea Overby, an analyst at Wells Fargo. “This is material.”
Recent examples show hotels being especially hard hit, given the collapse in tourism and business travel. A Crowne Plaza hotel in Houston was valued at $25.9m this month, down 46 per cent from when it was bundled into a CMBS deal in 2014. The hotel, which sits just off the Katy Freeway has not paid its mortgage since March and was transferred to the special servicer in May.
The Holiday Inn La Mirada, about 20 minutes drive from the centre of Los Angeles, was recently valued at $22.1m, down 27 per cent since it was securitised in 2015, having not paid its mortgage since April. Another Holiday Inn in Columbia, Tennessee, had its appraised value cut by 37 per cent this month to $7.7m.
“The numbers themselves are atrocious,” said Gunter Seeger, a fixed income portfolio manager at PineBridge Investments. “A 30 per cent markdown in appraisals pretty much across the board is horrific.”
The number of new appraisals is accelerating. The Wells Fargo analysis covers 116 struggling properties bundled into CMBS that have had new appraisals since April 1 — 68 of them this month.
Of the total, 75 of the mortgages were backed by hotels while 26 were retail properties, whose tenants have been struggling under lockdown-enforced closures and economic weakness.
Banks have been raising provisions to cover potential real estate losses this year, and the number of commercial real estate loans in US bank portfolios that were flagged as being potentially problematic spiked in the second quarter.
Meanwhile, CMBS investors have been keeping an eagle eye on appraisal values to gauge their risk of losses. Over the past four years, the average loan-to-value ratio on mortgages bundled into CMBS has been below 60 per cent, giving investors a sizeable cushion, even if a property has to be seized and sold for the loan to be repaid.
Coronavirus has substantially eroded that cushion, however, and loan-to-value ratio in the average multi-property CMBS is now almost 90 per cent.
“The longer this crisis goes on, we will move into a valuation problem,” said James Shevlin, president of special servicer CW Capital. “It absolutely concerns us but right now I still think we are covered.”
New appraisals are an early step taken by special servicers and help them assess how much time to offer borrowers to resolve their difficulties before they start foreclosure proceedings.
Special servicers and analysts said that it can be challenging to accurately appraise a property in the current environment. The potential sale value over the next few months could be heavily affected by another uptick in coronavirus cases, more stringent rules governing travel and people’s ability to go outside, or even a volatile presidential election. Equally, property values could appreciate if the economic recovery gathers speed.
“It’s someone’s best estimate of value,” said Alan Todd, an analyst at Bank of America. “Right now there is so much uncertainty. There could be a very high margin of error.”
Additional reporting by Robert Armstrong
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