The raging housing pandemic

BY JAY BRIJPAUL

Toronto housing is on fire, and COVID-19, a lifeless germ is the culprit. Affordability, unfortunately, has become the victim. The shockwave is widespread, and many businesses are on life support. The housing inferno is at its boiling point. House prices went up by almost 25% this year. To put this into perspective, a home that was worth $600,000 in January this year went up by another $150,000 by the year end. For COVID-19, there is light at the end of the tunnel with the vaccine but for housing, the train is picking up momentum.

With massive unemployment, city wide lockdowns and mortgage deferrals, its logical to believe that the real estate market will change direction. While house prices are surging, condo prices are tumbling. This is an unusual trend in normal times, but things are abnormal. A few years ago, mask wearing was for bandits and now socializing has changed to social distancing. Parents are working from home while their children are attending schools virtually. This arrangement requires more private space. Condo living cannot accommodate for the sudden shift in lifestyle. Families are exploring new ventures.

The pandemic sparked government interventions, one being lower interest rates. A five-year mortgage can now be financed at 1.7%.  With low interest rates, buyers can qualify for more debts. As a result, many buyers who would have otherwise qualified to buy a condo, are buying houses instead. With the pandemic, short term rentals, which are mostly condos, are dribbling. As a result, investors are ditching their condos and buying freehold properties. The demand for freehold properties is climbing while the demand for condos is dropping. In addition to that, many newly built condos are up for sale. These units are small and cannot accommodate the modern family. With an increasing supply, the condo market will continue to suffer.

Some sellers with freehold properties are postponing selling because of the pandemic. Seniors prefer to stay in their homes instead of moving to a retirement home. The supply chain is disrupted and that creates scarcity. Many buyers who worked from home are relocating to smaller towns where they can buy a detached home for about the same price as a GTA condo. Because of this, out of town properties are sprinting uphill.

Homeowners who were experiencing financial hardship earlier in the year opted for mortgage deferrals. The drastic price growth becomes their life raft during turbulent times. With more home equity, many are able to refinance, centralizing their debts into a new first mortgage and lowering their monthly payments. The price gap between homes and condos continues to grow. As a result, it is becoming more difficult for buyers hoping to sell their condo and use the proceeds to buy a house to do so.

With low interest rates, a fall in condo prices and a rise in home prices, the condo market will rebound. Many first-time buyers will give up renting and buy condos instead. This move will add fresh oxygen to the stifling condo market, lighting it on fire. For buyers who are waiting for the price to plunge, this is one of the best times to buy condos because they can negotiate a lower price.

With the pandemic, many small businesses are suffering. It is estimated that over 10,000 restaurants will not survive the pandemic. This will certainly affect jobs and the end result is that some homeowners will continue to have a hard time meeting their monthly financial obligations.

There are many lessons to be learnt from this pandemic. We will never look at the world the way we used to see it pre COVID-19. Online shopping will outpace in-store because it is time saving and convenient. As a result, many retail businesses will either close shop or move to online. Employers realize that it is more cost effective if their employees can work from home. With the new trend, commercial real estate will suffer and more people who can work from home will social distance themselves to smaller towns. Virtual classrooms, from elementary to university, will become the norm and families will be looking for more space.

Herd immunity occurs when over 80% of the population is inoculated for COVID-19. This will take a while and it is too early to predict the future. A different strain of virus can emerge, sending us into panic mode and we do not know how long the vaccine will protect us. With a connected world, it is easy for viruses to spread and we are not prepared to handle it.

Homeowners are taking on more debt. Interest rate is low and will remain low for a few years. When the pandemic is over and the economy picks up, interest rates will climb to curb inflation. My advice is to reduce debt and stay financially strong.