But market observers say a group of homeowners seem particularly vulnerable: over-indebted homeowners.
“You have investors who were sitting on a portfolio of maybe five to ten rental properties and had leased them all from the short term rental market,” said Stephen Brown of Capital Economics.
Home sales down 14% in March compared with February
In the pre-coronavirus economy, “Airbnb seemed to be the best game in town,” said David Larock, a Toronto mortgage broker and owner of Integrated Mortgage Planners.
Often, real estate investors would make much more money by renting a house for weeks or days at a time than they would have with a traditional lease, he added.
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But with the country locked and the US border closed, the short-term rental business dried up overnight, Brown and Larock noted.
What happens next could have implications for both the rental and real estate markets.
Some investors are likely trying to find long-term tenants for their short-term rentals, said RBC economist Robert Hogue. This could add a much-needed supply to tight rental markets, he added. Vancouver, Toronto, Montreal and Ottawa all had vacancy rates below 2% in 2019, according to data from the Canada Mortgage and Housing Corporation.
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But some struggling homeowners may have to sell their investment properties.
“Some of these people have tenants who just can’t pay, and maybe … their own income has been affected,” said Larock.
Mortgage deferral options are not always available for investment properties, while Ottawa’s planned rent relief program applies only to commercial landlords.
Cash-strapped homeowners could therefore be among the first homeowners forced to unload real estate they can no longer afford, which could put downward pressure on prices, said Larock.
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Another set of homeowners in dire straits are those who bought a new home before the foreclosure and haven’t sold the old one yet, Brown said.
“It’s a small proportion of people who are basically stuck now with two houses,” he said.
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These two homeowners’ groups are the main reason why Brown expects home prices to drop five percent nationally over the next three months.
In some of the larger cities, such as Toronto and Vancouver, the price drop will likely be more severe – up to 10%, said Brown.
Although short-term rental listings do not exceed 0.8% of total private housing in Canada’s urban clusters, they often represent a much larger share of the housing supply in certain urban areas, says study from McGill University.
For example, “in certain census tracts in downtown Montreal. one in ten homes is often rented on Airbnb, “says the report.
According to Larock, several homes sold at lower prices in the same neighborhood could also have ripple effects for buyers.
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Although Larock does not yet see this happening in Toronto, “if house prices start to fall … the risk that a property will not assess what a borrower has offered to pay will increase,” said he wrote in a recent blog post. This could force home buyers to make a difference, he added.
For example, suppose a buyer signed up to buy a home for $ 500,000 with a 25% down payment of $ 25,000, said Larock. If the bank’s valuation later assessed the property at $ 475,000, the buyer may be required to pay the price difference of $ 25,000 in addition to a 5% down payment of $ 23,750 (5% $ 475,000).
In another scenario, buyers with enough cash for a 20% deposit may now find themselves forced to use some of the money to close the price gap, which could force them to deposit less than 20 % and be forced to sign up for a 25-year amortization period instead of a 30-year amortization period, Larock noted.
A longer amortization period results in lower mortgage payments. However, if they choose depreciation over 25 years, Canadians must have a deposit of 20% or more.
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Still, homebuyers can protect themselves from the risk of mispricing by making their offer conditional on financing, a practice that is becoming more and more common in a pandemic, said Larock.
At RBC, Hogues believes the chances of a significant drop in house prices remain low.
Figures for March showed that sales were down more than 14% nationwide from February, and the numbers are expected to be much uglier in April, the first full month of foreclosure. Data for the first week of the month showed a 50% drop in sales in Canada, Hogue noted in a recent report.
But the number of new homes for sale also fell from a cliff, and with sellers and buyers largely on the margins, property values generally “hold up,” Hogue noted.
What happens next in terms of housing prices will depend on whether or not there is supply and demand, Hogue said.
The speed of recovery in the housing market, he said, will largely depend on how quickly the labor market heals. The higher unemployment remains, the slower the recovery in the housing market, he added.
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Much will also depend on immigration from abroad, which has been a major driver of housing demand in recent years, said Hogue and Brown.
Hogue’s baseline forecast is for prices to drop in Toronto, Vancouver, Ottawa and Montreal.
The outlook, however, “is not as rosy” in the Prairies, where prices were already falling slowly and unemployment even higher before the health emergency, according to Hogue. It does not help the region face the double whammy of a stuck economy and the collapse of oil prices, he added.
However, Brown sees a small silver lining.
Because these housing markets did not have much price momentum at the start of the crisis, he said, there may also be fewer possibilities for property values to fall.
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