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Residential real estate: a reckoning or just a softening? – Morningstar.ca

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Editor’s note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

Residential real estate activity fell dramatically by 65% across Canada since the pandemic struck, the fall reaching levels of -80% in Toronto, according to Royal Lepage, as unemployment, loss of revenue and an immigration slowdown combine to make conditions harder for home sellers, condo owners and multi-apartment landlords.

However, it doesn’t seem like buyers are shying away.

“We thought the market would hit pause for a while, and that sellers would be stepping in,” says John Pasalis, president of Realosophy. “Over the past couple of weeks, we saw buyers coming in, but not sellers. We have fewer listings now than we had two weeks ago and sales are even slightly picking up.”

Conditions also appear good in the multi-residential segment, at least according to numbers coming in from major REITs, reports Howard Leung, REIT analyst at Veritas Investment Research. For example, Killam REIT, present mostly in Ontario and in Eastern Canada, “reported that its rent collection for apartments in April was at 98.6%, Leung notes. At Boardwalk, with its base in Alberta, the level was 92% as of April 13th.  But a collection rate of 90% may not be representative of the overall landlord population and more the fact of professional landlords.”

This is not to say that the picture is rosy – or will stay that way in the short-term.

Challenges building up
A major factor to keep in focus is unemployment and, more importantly, reemployment. CIBC Capital Markets predicts that the jobless rate, that stood at 5.5% at the end of February 2020, will swell by two million to a peak of 14%, then fall back to a recession plateau of 8% by February 2021.

“With businesses stretched, how many people will companies rehire? There’s no on/off switch here, but rather a gradual restarting of the economy. An outfit that hired 20 employees and cut that down to 3, will maybe only rehire 7 or 8,” Leung says. That will create a lot of softness in all markets, real estate included.

The unemployment situation brings into play the historically high indebtedness of Canadian households, which on average owe $1.78 for every $1.00 of after-tax income. The CIBC report points out that elevated levels of debt will work to amplify the negative shock to incomes seen from job losses, which will be displayed in a notable increase in the number of mortgages in arrears. So far, between 10 and 15% of mortgage borrowers have deferred payments.

Pressure on rentals
This could have a harder impact on the rental market, which is expected to be most threatened in the shorter term. “The jobless are skewed toward youth and part-time workers, which are prominent in retail, restaurants, tourism; and youths tend to play a smaller role in the housing industry,” indicates Phil Soper, CEO of Royal Lepage.

All signs indicate a downward pressure on rent, with tenants who can’t afford them,” notes Pasalis, who is nervous about condo rentals, many of which are cash flow negative and don’t cover their carrying costs. “Can they afford to lose $200 or $300 a month on carrying costs?” he asks. In large urban markets, rents are often higher than the $2,000/month relief contributed by the Federal government.

On their own, the present pressures could quickly precipitate a real estate crash. “But we have a huge backstop in Canada, with banks that can restructure mortgages (unlike in the U.S. where banks massively securitize mortgages), the Canadian Mortgage and Housing Corporation that insures mortgages, the Bank of Canada that can buy bank bonds if they run out of money,” says James McKellar, professor of real estate and infrastructure at the Schulich School of Business of York University. Add to that the diverse $200 billion Federal relief programs for individuals and companies. “All that pushes further in time any day of reckoning for real estate in Canada,” concludes McKellar..

Immigration?
The hold on immigration is another key factor that will impact real estate. “Because of immigration, Toronto grows by an equivalent of one Calgary every 10 years,” notes McKellar.

Seventy-two percent of immigrants who have been here seven years own their house, “so a drop in immigration should not have an impact on the residential market in 2020, but could impact it in three or seven years. The impact will be felt more quickly in the rental market, but that market is very tight. In Toronto, there’s less than 1% rental availability, in Montreal, 2%,” says Soper.

What to do?
In the long run, things don’t seem as dire. “If the recovery unfolds without any major second wave reset, in 12 to 18 months residential real estate will come through the crisis relatively unscathed. Overall, as the fog clears, we expect to see average prices 5-10% lower relative to 2019 levels,” CIBC notes.

Analysts agree that for most people, their home is their shelter, and that is a huge value at this moment. If you don’t need to sell it, stay in it! “Don’t sell, even if you expect a recession,” advises Pasalis.

“People think that they should sell and rent, but there is very little potential there. You shouldn’t be worried for the value of your home because fundamentals are still solid. Prices might get a little softer, but they will pick up,” Soper says.

However, some must sell because of retirement, health or other considerations. If you were thinking of selling in two or three years, you might as well sell now and not take any risk with future developments. “Yes, you might miss a bull market, but if you sell now, you won’t lose very much,” says Pasalis.

For investors, the REIT market is worth looking at, notes Howard Leung. “They were all sold off together indiscriminately at the end of March despite having rebounded somewhat. But if you do your homework, I think you can find some reward there, but only in individual titles. I wouldn’t necessarily go to an index or an ETF.”

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Despite the challenges, Edmonton area real estate values 'have held up extraordinarily well' – Edmonton Journal

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I have to say the Edmonton area real estate market has surprised me.

When you consider the onslaught we have had in the past five years — oil price crash, more than 100,000 job losses, fires, floods, domestic and international trade disputes and then COVID-19, I would say the Edmonton and area real estate values have held up extraordinarily well.

Since 2014, we’ve only seen modest declines in prices, with single family homes declining the least. Edmonton remains Canada’s most affordable major city with one of the highest average incomes.

Other Canadian cities have seen significant price gains in the same time period creating a bigger difference in real estate values between regions. We have had clients who can work anywhere and chose Edmonton as they can afford much nicer living quarters here for the same money.

Given the lower prices and interest rates combined with rising rental demand, it is easier for investors to get positive cash flows. We are seeing investors looking at condos for their positive cash flow. This fact will help to support our real estate values.

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Toronto and Vancouver Real Estate Inventory May Get A Boost From AirBNB Slowdown – Better Dwelling

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Canadian real estate markets may be getting another inventory headwind soon. National Bank of Canada (NBC) research estimates AirBNB hosts may contribute to oversupply later this year. As the slowdown impacts hosts, many may be incentivized to sell. By their estimates, just a quarter of hosts selling would cause inventory in cities like Toronto and Vancouver to swell.

AirBNB and Housing Inventory

AirBNB helps homeowners take existing housing stock and convert it to short-term rentals. Rather than staying in hotels, travelers can now stay in existing non-hotel stock. At first, it wasn’t a big issue when just a few people were doing it. As the platform expanded, people began buying additional housing just to operate short-term rentals. By repurposing housing that would otherwise be long-term units, cities now need additional housing. Basically, short-term rentals lead to an inventory squeeze, pushing rents and prices higher. Temporarily at least, for as long as the squeeze persists. That squeeze could end as quickly as travel did.

The Travel Industry Expects A Big Slowdown

The travel industry doesn’t expect travel to recover quickly from the pandemic. The US has approved some routes cutting plane traffic up to 90% until September. The IATA, the trade association for international airlines, also doesn’t see traffic returning to 2019 levels until at least 2023 – at the earliest. What does this mean? Fewer users of short-term rentals, and more competition from hotels for those travelers. All of this can have a big impact on real estate inventory, according to NBC numbers.

Canada’s Biggest Real Estate Markets May See Inventory Spike

If just a quarter of AirBNB inventory is sold off, NBC sees a lot more real estate listings on the market. In Vancouver, the bank estimates real estate listings would rise 12%. Montreal would see an increase of 27% in resale listings. Toronto is another story though, with inventory forecasted to rise a whopping 34%. That’s with just 25% of AirBNB exiting as hosts.

AirBNB Boost To Canadian Real Estate Inventory

The potential increase in real estate listings if 25% of AirBNB properties were listed for sale.

Source: National Bank of Canada, Better Dwelling.

The boost is another headwind for inventory rising later in the year. Inventory was already expected to rise in the coming few months. NBC economists believe this would be “exacerbating oversupply in the coming months.”

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How Is The Real Estate Market In Muskoka Post COVID19 – Hunters Bay Radio

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In a brand new video podcast series, Gerry Lantaigne with Sutton Group – Muskoka Realty discuses the world of real estate in Muskoka during the Coronavirus pandemic.

Join Gerry every month as he updates you on The State of Real Estate

Watch the inaugural episode here:

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