By Tracy Hanes

The economic outlook remains rosy in some sectors, bleak in others

With COVID-19 still putting a chill on socializing, retail sales and indoor dining as we enter 2021, will the red-hot Ontario real estate market it helped to fire up in the latter half of 2020 continue?

According to four prominent economists, the answer is no. The pace of home sales that characterized the summer and fall of 2020 is bound to ease. However, don’t expect a dramatic slowdown in the province’s housing industry; overall, it will remain robust. But it will be a story of a varied market, with downtown Toronto condos and rentals being at risk, while low-rise sales will continue to be strong.

“COVID has affected Ontario workers very unevenly,” said Robert Hogue, Senior Economist, RBC Economics. “Most lower wage earners are affected in terms of job losses and fewer hours than those at the higher end, who are either not affected or affected modestly. Homeownership tends to be for families and higher income earners, so that base of potential buyers has not been as severely affected or not affected at all.”

Even though a vaccine may signal the end of the pandemic, it will take some time. And even when COVID is behind us, some of its impacts will linger.

HOW THE MARKET CHANGED

Among the trends that COVID has created or accelerated are low interest rates and more people working from home, and that has increased demand for low-rise homes in the GTA suburbs and other parts of the province. 

Those factors, along with a pause on immigration and the loss of many lower-wage jobs, have negative repercussions for the downtown Toronto condo and rental sector that might well continue beyond 2021.

The number of people working from home in Canada, according to Hogue, doubled from 2 million workers pre-pandemic to almost 4 million during. “I suspect a big chunk of them will continue to work from home as a new permanent arrangement,” Hogue surmises. “COVID has been a large-scale experiment in that respect. For some organizations, it’s been wildly successful. I work for a large bank that has 80,000 employees and at one point 80% of us were working from home, and we haven’t missed a beat. It’s been proof of concept, but it’s not a fit for everyone.”

Hogue says many organizations will be more flexible about employees working remotely, and that’s helping to drive many out of the downtown core. It’s opened a lot of new frontiers for those no longer tied to a GTA office, as they seek larger houses to accommodate working from home and family living, more greenspace and the ability to safely distance from others in less dense environments.

“I think we have yet to see this phenomenon run its course,” he predicted. 

Sal Guatieri, Director and Senior Economist at BMO Financial Group, said sub-2% long-term mortgage rates, coupled with the working-from-home trend bolstered sales in smaller precincts throughout southern Ontario. 

“The biggest increase in sales and prices is occurring outside big cities. We’re seeing this to a lesser extent in the U.S.,” he said. “People are moving out of Toronto and to the Greater Golden Horseshoe and beyond. That’s where you’re seeing the biggest price increases, of 20% or more (year to year). It’s a clear trend, with many of the sales shifting away from larger metropolitan regions to suburban and rural regions.”

Deputy Chief Economist of CIBC World Markets Benjamin Tal said that part of the increase in home prices in 2020 was due to buyers being more active in the low-rise detached sector, and those homes are more expensive, thus driving average prices up. 

“At this point, that’s linked to the nature of the crisis,” said Tal. “People who initially may have been thinking of a condo are now buying a detached home. The process of people moving away from city is nothing new, though. We’ve seen this trend before, but I think it is accelerating.” 

Many buyers are millennials, who have or are about to start families and need more space. The cost of a three-bedroom condo in Toronto is beyond their means, so they look to the suburbs.

And because of COVID and technology facilitating working from home, people are willing to pay more for homes since they are spending less on transit and restaurants, explains Canada Mortgage and Housing Deputy Chief Economist Aled ab Iorwerth. 

Iorwerth, however, is not convinced there is strong evidence of people leaving downtown Toronto in droves. “There are some anecdotes of people buying more property in the suburbs, but the immediate perspective is on the weakness in the rental market.”

A DOWNTURN FOR HIGH-RISES

The other economists agree that the downtown Toronto rental and condo markets are at risk. 

“On the condo side, it’s more of a downtown Toronto story,” said Hogue. “When you get out of downtown and into the suburbs, and in places like Ottawa, condos are pretty strong.”

“There are multiple things going on,” Iorwerth noted. “The people unfortunately affected by the economics of COVID are low-wage earners and that’s affected rents. With restrictions on immigration and restriction on travel, interprovincial migration dropped, and students stayed home (rather than renting close to post-secondary campuses), causing quite a lot of weakness in the rental market.”

Tal says clearly while immigration into Canada from other countries is down, it is somewhat mitigated by people who are opting to stay in Canada rather than move to the U.S., as well as Canadian citizens who are returning to Canada from Hong Kong and the U.S. The main impact of the current pause on immigration is on the rental market, since for the first few years in Canada, immigrants rent rather than buy, says Tal. The rental market is also down since international students have not been able to come to Canada to pursue post-secondary education. “However, I believe the immigration story is a temporary one, and the government has increased the (immigration) target to compensate. So I believe the quota will come back.”

According to Hogue, downtown Toronto condo resales are still up year-after-year and are softening, but not collapsing. There was a “huge wave” of listings in late fall 2020 and he said many of those are likely investor-owned units. Some of those listings are likely due to new City of Toronto rules for short-term rentals, while some are partly COVID-related. The longer-term rental market also softened significantly and as a result, investors who purchased pre-construction units and had not yet taken delivery are trying to get out of deals; thus there are a number of assignment sale listings. 

“I suspect this is because the numbers don’t work anymore,” said Hogue. “If a unit is predicated on strong rent, that becomes a challenge.”

And what about the risk to Toronto’s office market as more people work from home? Tal said the office model isn’t dead and he predicts in 2022-2023, it will make a comeback. However, the office concept will be more flexible. “Who says everyone has to go to the office at 9 a.m. or if you have to go out to work when it’s -20C? Offices will still be there, but people may be working there two, three or four days a week. Working from home will be more acceptable.” Tal expects the office market will still be about 80% of what it was pre-pandemic, which is why he expects the trend to move outside Toronto won’t continue. 

The PwC/Urban Land Institute Emerging Housing Trends 2021 forecast for U.S. and Canada also expects the appeal of big cities to rebound. South of the border, many of the largest cities have been hard hit by COVID, affecting tourism, office space use, transit ridership and live entertainment. The report predicts while large cities will likely feel the impact of that for three to five years, the pandemic pause likely isn’t permanent. Larger metropolises will eventually regain their lustre due to the education, finance, technology and entertainment opportunities they provide.

WHERE MARKETS ARE HOT 

Tal said in the GTA people are “trying to live the dream” and because they can’t find affordable homes in Toronto’s closest suburbs, they are moving to places such as Barrie, Kitchener, Guelph and Oshawa.

Pre-COVID, Ottawa was the hottest market in Ontario and arguably in Canada, said Hogue, with double-digit price increases early in 2020, and as of late 2020, prices were still escalating—attributable to low interest rates, the large number of public servants who still have good-paying jobs and because it’s still more affordable than Toronto. 

Iorwerth noted that the Ottawa market was so hot prior to the pandemic that CMHC actually flagged it for risk due to rapid price growth. People were moving to Ottawa from Toronto already in search of less expensive homes and will continue to do so. 

“Smaller markets across the board in southern Ontario are super strong on a year-to-year basis,” said Hogue, citing places such as Kitchener-Waterloo, London, Guelph, Barrie, Collingwood and southern Georgian Bay. He said that while some people are buying secondary homes in what were considered vacation destinations, skyrocketing school registrations indicate some families are making a permanent move. 

October statistics released by the Canadian Real Estate Association in October 2020 show the largest year-over-year gains nationally were recorded in Quinte and District and Woodstock-Ingersoll at 25%+, as well as in Ottawa, London and St. Thomas, Tillsonburg district and some Ontario cottage country areas. Price gains of 15-20% were seen in Barrie, Hamilton, Niagara, Guelph, Bancroft and area, Brantford, Cambridge, Huron Perth, Kitchener-Waterloo, North Bay, Peterborough and the Kawarthas, Simcoe and District; outside of Ontario, Montreal and Greater Moncton saw similar gains. Prices were up in the 10-15% range compared to October 2019 in the GTA, Oakville-Milton, Mississauga and Northumberland Hills.

The Emerging Housing Trends 2021 report predicts secondary cities such as Vancouver and Montreal have the potential to be ‘18-hour cities,’ where a range of amenities and urban features provide good prospects for accelerated growth, pandemic or no pandemic. In Ontario, these include Kitchener-Waterloo, London and Ottawa, which, according to Statistics Canada, were the fastest-growing census metropolitan areas in 2018–2019. The trend is expected to be Canada-wide, spreading to cities such as Halifax, Victoria and Quebec City.

The report indicates that even with people able to work remotely, suburban areas where denser, transit-oriented development is creating walkable mixed communities will prove most attractive to those looking to move outside the 416. 

THE U.S. ELECTION AND SOFTWOOD LUMBER

With Joe Biden’s presidency in the United States, Iorwerth expects more stability in trade relations; that in turn may give businesses more confidence to invest and promote job growth, particularly in manufacturing provinces such as Ontario and Quebec. That, in turn, should boost people’s ability to buy homes.

But whether the ongoing softwood lumber issue and the dispute over U.S. duties will be resolved is up in the air. “It’s my hope that the politics of this works out,” said Iorwerth.

Hogue believes the stability in trade relations and a more predictable administration under Biden will be welcome. While Biden’s opposition to the Keystone Pipeline is not good news for Alberta, “for Ontario, anything that can stabilize trade relations is a good thing.”

THE MARKET THIS YEAR

“I think pent-up demand has been exhausted, but there is still a greater demand for more single detached living space,” said Iorwerth. “It’s a trend that, combined with low interest rates, is likely to remain.” That’s if the economy recovers, he cautioned. What he sees at continued risk is the rental market and the potential to spill into homeownership. However, if the government programs assisting workers and businesses impacted by COVID continue, there is no immediate risk.

“The current level of activity in the housing market is not sustainable,” agreed Hogue. “There is going to be a step-down from what we saw in summer and early fall of 2020. There was a lot of pent-up demand that has been completely exhausted. But COVID has people considering moving where they wouldn’t have otherwise, as they now can due to remote working. That will contribute to supply and demand, and the continued low mortgage rates will support relatively strong market activity in the near term. I would be hard-pressed to think the heat we saw in summer of 2020 can be sustained, but the market is still robust.” 

Guatieri also felt the rates of growth in sales and prices was unsustainable, but forecasts the 2021 market to hold firm. “I’m not expecting a price correction,” he says, “but significant moderation in growth in terms of prices and most of that softness will be in metropolitan regions. The broader suburban and rural regions will remain affordable, and the rest of Canada is very affordable.” The slowdown will be a healthy one, Guatieri expects, led by softer condo sales.

As  for Tal, he looks for the economy to slow down, with economic growth of near zero over six months. “You can’t have zero growth and a booming real estate market,” he pointed out. 

The PwC/ULI report cited the single-family residential recovery as uncertain and that it is too early to determine whether the potential slowdown in urbanization will be long-term. If many homeowners are able to work from home permanently, they may continue to look outside large cities. Though the interest in properties outside of Toronto has extended to places such as Niagara and Peterborough, it may not be a lasting trend.

The Central Bank of Canada predicts that Toronto’s economy will rebound by 6.2% in 2021, leading to strong pre-construction sales in the city. When immigration activity resumes, the PwC/ULI report expects there will be pent-up demand to help rescue rental units. 

In aggregate, Hogue does not expect prices to decline, but price increases will certainly slow down. The decline in downtown Toronto prices seen in late-2020 will continue, he says, but it won’t overwhelm the price increases of the low-rise market. 

“Condo prices will decline 5-10% in some pockets, maybe more, especially those heavily geared to short-term rentals,” Hogue prognosticates. “It’s going to be more of a nuanced picture. It will be an uneven market, as opposed to past booms when the tide was raising all boats.”

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