The COVID-19 pandemic is affecting markets around the world, including here in Canada. New developments are coming out every day, and it can be hard to predict where things are headed. The Canadian real estate market faces uncertain times, with many drawing comparisons to the 2008 financial crisis. Though it did not hit Canada as hard, or last as long as the recession in the United States, 2008 was a time of uncertainty for the Canadian real estate market and the economy as a whole.
Given that RBC and CIBC are now predicting that Canada will slump into a recession in 2020, it’s worth taking a look at the last recession we entered and how it affected the Canadian real estate market. While nothing can predict what will happen during and following the current crisis, seeing the similarities and differences laid out next to each other will present readers with the challenges ahead.
Fear and Uncertainty
While the types of fear and uncertainty may be different, the 2008 financial crisis and 2020 COVID-19 pandemic are both great examples of how fear and uncertainty can affect the real estate market. Buyers and sellers were, and are, asking themselves similar questions:
- Will the market pickup after the crisis subsides?
- How long will a recession last?
- Will interest rates stay this low for much longer?
These kinds of questions may give buyers and sellers pause, as they did in 2008.
Potential Deposits Could Be Tied Up in Financial Markets
In both crises, stock market investors faced significant losses. The TSX Composite Index has fallen over 5,000 points since February 20th, and in 2008 it faced even greater losses. If investors have lost money that could have been used to purchase property, the market could see less buyers. In 2008 resale housing prices fell by roughly 9% across Canada, with the financial market turmoil playing a significant factor.
Another contributing factor to the decline in prices for resale and new homes in 2008 was job losses, as exports fell due to a truly global financial crisis. The coronavirus pandemic is also global, and though job losses are mounting quickly, Ottawa expects as many as 4 million Canadians to apply for emergency job loss funding.
While both crises saw job losses, the emergency response benefit is a major difference in policy. Justin Trudeau announced a streamlined application process on Wednesday, to make it easier for people to receive federal money. Workers will be able to receive $2,000 per month if they’ve lost their jobs due to COVID-19, a move that will help keep both renters and owners from missing monthly payments.
Similar to in 2008, interest rates have been slashed in Canada in an attempt to help the economy during these challenging times. As of today, rates have been dropped to 0.25%, a measure which also took place on April 21, 2009. The Bank allows a 0.25% deviation above or below its target rate, which means that a target of 0.25% a lower bound of 0.00%.
One slight difference between 2008 and 2020 is how quickly the Bank of Canada took interest rates down. In 2008, the first rate drop took place on October 8, with a move to 0.25% taking over 6 months. During the COVID-19 pandemic, we’ve seen rates go from 1.75% to 0.25% in just a few weeks. Historically low borrowing costs help keep the real estate market steady and give new buyers an opportunity to get in the market.
The biggest difference of course between the 2008 financial crisis and COVID-19 pandemic from a Canadian real estate perspective is the health aspect, which obviously was not a part of the 2008 predicament. To stop the spread of coronavirus Canadians have been encouraged to enact social distancing and self isolation measures, which has a ton of implications for buyers and sellers. Open houses have been banned due to social distancing requirements, and showings are being conducted by appointment only at this time. Sellers looking to downsize may choose to wait for such measures to be relaxed if they (understandably) don’t want multiple buyers walking on the property they currently occupy.
We’ve yet to see what kind of effect this will have on the market, but it’s not hard to imagine older sellers holding off for a few months, even if this is a seller's market in many areas of the country.
Delayed Mortgage Payments
In 2008, Canada entered the global financial crisis better prepared than most other countries. The housing inventory in Canada was much lower than in places like the United States, which had experienced a cycle of low-interest rates from a previous recession in the early 2000’s and invested heavily in new home starts. In addition to less inventory, Canadian lenders also had stricter conditions than their American counterparts, which helped prevent a larger housing crisis from occurring. This kept the government from taking more drastic actions.
During the current crisis, more action has been required due to the sudden and severe loss of jobs. Delayed mortgage payments are being offered by all of Canada’s six big banks, in an effort to keep Canadians in their homes and to help stabilize the market.
A Potential End Date
The last major difference to mention that could affect the Canadian real estate market is that COVID-19 likely has an expiry date. The estimated timeline for a vaccine is still 12 to 18 months away, and there are suggestions that if the spread of coronavirus is flattened, self-isolation measures will be relaxed. In this scenario, the real estate market would likely see more buyers take advantage of low-interest rates and a postponed new stress test which could be implemented soon after normalcy returns to the country. A post COVID-19 world awaits us, and it could certainly bring a lot of buyers off the sidelines.