Canada’s big-city condo market most vulnerable to pandemic headwinds

The Globe and mail – September 17th 2020

The big real-estate story in recent months has been the surprising resilience of the residential property market, with record price increases and fierce bidding wars, even in the face of double-digit unemployment. The crash in housing prices anticipated by many in the spring has yet to materialize.

“Our views are changing,” says Robert Hogue, a senior economist with Royal Bank of Canada. “The strength [in the summer] was quite a bit stronger than we might have thought. Clearly, there was pent-up demand from March and April, but we didn’t think it would pop that much.”

The market will likely cool down as that demand runs its course in the coming months, Mr. Hogue forecasts, but predictions of an overall price decline may have been premature. However, he says, there’s one possible exception: big-city condos.

“In single detached or low-rise, demand/supply might remain tight enough to see price increases,” Mr. Hogue says. “But we do see things softening enough to drive condo prices down; we see any weakness concentrating there.”

For a variety of reasons – declining immigration, a softer rental market and a sudden preference among buyers for more spacious accommodations – the big-city condo segment is most vulnerable to post-COVID headwinds.

A sales slump would be a major turnaround for that housing category, which, in many cities, stormed into the beginning of 2020 with price increases outpacing that of detached houses. In the first quarter of 2020, new condo prices in the Toronto metropolitan area were up 14.6 per cent over the previous year, with resale prices up 8.5 per cent, according to Statistics Canada data. In Montreal, those numbers were 9.8 per cent and 8.2 per cent, respectively, and in Ottawa, new condos were up 22.6 per cent year-over-year, with resale up 15 per cent. Vancouver was the outlier, with modest price decreases.

Since March, however, both price growth and sales activity for condos have trailed other market segments.

“One thing we have seen is a bit of a move out of the core in terms of buyer interest,” Vancouver realtor Dan Morrison says. “People’s needs and lifestyles are changing, as [they] look for more space and don’t maybe need to come to the office, so these are question marks above the market.”

That said, Mr. Morrison stresses the impact of changing buyer preferences is relatively modest so far: “We certainly haven’t seen the urban exodus some people have been predicting.”

Still, there’s been a noticeable shift in some cities. According to the Real Estate Board of Greater Vancouver, apartment-home sales in the metro area remained higher than detached-home sales in August (1,332 versus 1,095). However, that still represents a modest move to the detached market: year-over-year, apartment-home sales were up 19.4 per cent, while detached homes were up 55.1 per cent.

“Detached homes are selling very quickly, often with multiple offers, as people pay a premium for space,” says Brendon Ogmundson, chief economist with the British Columbia Real Estate Association. “Condos, while recovering, are not quite at the same pace…and the market for condos is not nearly as under-supplied. I’d expect things to balance out for the apartment market in the fall while single-family will continue to trend higher.”

Elsewhere, sales growth and price growth have similarly fallen behind the single-detached and low-rise market, but realtors aren’t exactly panicking. Statistics from the Quebec Professional Association of Real Estate Brokers show Montreal-area condo prices up 13 per cent year-over-year in August, only slightly behind single-family homes, with a 15-per-cent increase.

In the Greater Toronto Area, condo prices were up 9.5 per cent in August versus last year. Within the city of Toronto itself, prices were up 8.7 per cent year-over-year. That was the smallest price appreciation of any market segment – and well below detached houses at 21.4 per cent.

“We were seeing stronger sales on the single-detached front,” says Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB), “and we’re also seeing more listings coming on for condo apartments, so that’s moving toward a more balanced market.”

Preferences for more space and suburban locations have affected demand modestly, Mr. Mercer says. That’s had a knock-on effect in the secondary rental market in Toronto, where a decline in rents, and higher vacancy rates, are allowing renters a little more wiggle room.

“On the rental side of things, the one-bedrooms are moving due to price,” TRREB president and realtor Lisa Patel says. “But ultimately, I think people are in search of a little more space for their value…I’ve personally seen more demand in the two-bedroom units, or one-plus-den, and that’s where space plays a role.”

Things could change more significantly in the coming months, however, depending on a host of factors, among them the speed of economic recovery and the severity of a potential second wave of COVID-19. Of particular importance is the pandemic-related drop in immigration into Canada.

“Typically, newcomers to Canada go to the core major CMAs [census metropolitan areas], and they tend to be renters in their first few years,” Mr. Hogue says. “So this is a potentially major impact for the rental side of things, and that affects the ownership market through condo investors.”

Immigration has begun to creep back up, though. Canada added only 4,000 new permanent residents in April, but that grew to 11,000 in May and 19,000 in June. That’s still far below the 34,000 added in June, 2019, but the trajectory is clear. How fast it returns to normal, however, remains uncertain.

“Let’s say six months after everyone has been vaccinated, we can start to pass judgment on how lasting these emerging trends are,” Mr. Hogue says.

“My gut feel is that part of this work-from-home is here to stay, and that will have some effect on those downtown condos, especially smaller units. But how much impact these have, how lasting they are, I think we just have to wait and see.”