It’s no secret that the national economy has taken a beating since the COVID-19 pandemic was declared. But while as many as a million jobs have been lost across the country, one sector seems to be immune to it all so far: the Canadian home market, says commercial real estate investor Mitch Vandergunst, who founded Emvy Group Inc. in the London, Ontario region.
Looking at Ontario’s capital city, Toronto, the average price of a detached home still hovers around $1 million. As of June 2020, the average home prices in London, Ontario, was at close to $500,000, which is actually a jump of about $75,000 from the same time the previous year.
But why? That’s the question that’s hard to ignore when looking at the state of the economy and the rise in home prices in Canada. There are a number of factors; however, there are possibly two big reasons: one of them being supply and demand and the other being lower interest rates.
‘Pent-Up Demand’ Surged in Summer
When the pandemic was declared, it caused a lot of economic uncertainties. More specifically, buyers stayed away from making offers because of precarious job conditions, while homeowners were able to hang on to their properties thanks to government programs that replaced lost income.
The result was a flurry of activity that rose in Summer and brought record sales to the Canadian real estate market. Mitch Vandergunst cites data that shows there were more than 62,000 home sales in July 2020, which tops any numbers on record. Meanwhile, while some experts said this would cool off, the trend doesn’t show any sign of slowing. The Canadian Real Estate Association says records were smashed again in September.
While experts are now saying this “pent-up demand” is now losing steam, they don’t see a significant drop in home prices any time soon. In fact, some economists see prices continue to rise in the foreseeable future. That’s because demand continues to be strong while inventory is limited in some markets.
Lack Of ‘Adequate Housing Supply’
The Canadian Mortgage and Housing Corporation (CMHC) outright said that there’s a lack of suitable housing for many Canadians, which has increased demand and driven up prices. In fact, to address it, the CMHC is leading a challenge specifically designed to create more opportunities for buyers to find affordable properties, notes Mitch Vandergunst.
The two markets in Canada most affected by supply and demand gaps prior to the pandemic are Toronto and Vancouver. However, while supply has been strained in these markets while prices have surged, some experts were still baffled as to exactly why. In any case, many buyers (and renters) have turned to condos, which in Toronto are readily available due to an increase in construction, which has meant more affordability for those looking to live in that city.
Material Shortage Affecting Supply and Costs
However, there could be other factors that are causing a housing shortage, according to media reports. More specifically, Canada is facing a lumber shortage that is affecting how quickly developers can build homes. At the same time, due to the scarcity of materials, both commercial real estate and residential real estate is becoming more costly.
Since many mortgage deferral programs from banks in Canada have ended, there could be a small percentage of Canadian homeowners that remain unemployed that will be forced to sell, explains Mitch Vandergunst. Theoretically, that could mean there will be more inventory on the market in the coming months at more affordable prices, depending on the urgency to sell.
Some pundits were warning of a “deferral cliff,” but it may not be as steep as previously thought.
Interest Rates Cut
The Bank of Canada provided some additional buying power to Canadians looking to buy properties during the pandemic. While it cut its benchmark interest rate to 0.25 in March, it also lowered its benchmark mortgage rate for the second time since March to 4.79%. Mortgage interest risk is considered as part of the “stress test” when buying a home in Canada, meaning the lowered mortgage rates have allowed more buyers into the market, explains Mitch Vandergunst. It also means buyers might be able to qualify for a slightly pricier home, he adds.
How long will home prices in Canada continue on an upward trend? That is something that’s hard to predict given the variables, and it could also depend on the extent of the second wave of COVID-19. However, a recent report shows residential real estate could drop about 7% due to continued unemployment. The same report acknowledges that while Toronto and Vancouver continue to be unaffordable for many, there’s a “dangerous” oversupply of family homes in Edmonton and Calgary. Meanwhile, the CMHC has also said it expects average prices to cool off by next year.
Canada Home Price Growth Historically Strong, Says Mitch Vandergunst
Canada has had the hottest real estate market among G7 countries in the past 15 years. In fact, average home prices in Canada have spiked almost 90% during that time, and the next closest rise during the same time frame is in Germany at 32%.
However, one cannot dismiss the challenges facing Canadian real estate that could impact the market in the coming months and even years. One major factor is that Toronto in particular has long been in high demand as a place for new immigrants to settle — but demand for housing for newcomers has cooled off a bit recently due to COVID-19 related border restrictions.
With threats from unemployment looming and other uncertainties, it could be a different picture soon. But for now, Canadian home prices are rising against the odds, says Mitch Vandergunst.
Mitch Vandergunst has lived and worked in the Exeter, Ontario area for most of his life. Having played competitive hockey from the age of four, Mitch is no stranger to hard work and dedication. He worked his way up the ranks in minor hockey, and eventually earned a spot on professional rosters in the SPHL (Southern Professional Hockey League) and later the ECHL (East Coast Hockey League). These days, Mitch brings his work ethic and experience to the real estate industry. Since graduating from college, Mitch has been involved in real estate in some capacity. Today he operates a real estate investment company called Emvy Group Inc. which he founded. Currently, Mitch is investing in apartment buildings and flipping single homes in the Exeter and London, Ontario region.