Are we finally at the bottom of the real estate market? [COVID-19] May 4, 2020
Looking to enter the real estate market? Worried about the value of your property? Spoiler alert: check out this video as to why I don't see property values in Toronto decreasing any time soon.
Transcription:
Looking to enter the real estate market? Worried about the value of your property? Spoiler alert: check out this video as to why I don't see property values in Toronto decreasing any time soon.
Have a listen to the facts. Don't just say that values are going to drop 50% because you feel that the economy is going down the toilet, hear me out as to why I think the values are going to increase this year (or at the very worst, flatline). If you listen to the end, I'll give you some reasons as to what might actually cause a decrease in home values.
Are we at the bottom of the real estate market??
I’m going to guess that you tuned in to this video to either see whether or not the value of your largest asset has dropped, or that you may be thinking it’s time to swoop in and grab a sweet deal. Or maybe both. I’m not going to go bore you with numbers today, you can get those stats anywhere, plus, it’s probably inaccurate as sales volume has dropped significantly, so the transactions at the top and at the bottom are greatly skewing everything and it’s hard to make a proper analysis of this all. What’s probably obvious is that MLS sales activity in April has declined by 70% as compared to April 2019.
That being said, I’m a real estate broker, not an economist. I don’t profess to be one. So those of you keyboard warriors about to jump into the comments section, don’t worry, I’ve already admitted that you are right. I’m probably not qualified to be talking about this topic. There are so many ways to analyze the numbers and so many other external factors going on.
I can say that I have been in this business for 15 years, and a huge part of my job to stay up to date with what the experts are saying. So here’s the short answer: I think we may have hit the bottom already. Here are the reasons why:
Limited homeowners are affected: A report from the economists at TD say that the job losses in March were heavily concentrated in lower-wage industries. The hospitality industry, manufacturing, education, agriculture and others have been hit the hardest. Based on the millions of job losses in Canada, the majority of them are jobs that are below the average wage, in which homeownership rates are probably lower. Real estate is very expensive. I’m not saying that the wealth gap is fair, that’s a much bigger debate, but it is what it is.
Businesses are starting to reopen soon: Doug Ford has just announced a phased approach to reopen businesses safely in Ontario a couple of days ago, and that as of May 4th, some businesses are allowed to open. Everyone is eager to bring the economy back to normal, with safety as the top priority of course. These next few weeks will be critical to see if the number of new cases will be trending downwards or not. I have a sense that other businesses will get back to normal sooner than you think.
Interest rates are at an all-time low:
Interest rates are likely going to stay low for a very long time while unemployment is at an all-time high. The government needs to keep them low to stimulate the economy, so that people and businesses borrow money to invest in to the economy.New construction is expensive:
Look, prices of new construction aren’t going to come down. Maybe it will push demand for later, or incentives for buyers, maybe. But not prices.
Why? Well, here’s four of the main reasons:
First, land is not going to get any cheaper. They just aren’t making any more of it. Just think about it. If you’re a landowner, you’ve probably held that piece of land for many years if not decades, so what’s the difference if you have to wait a few more years for the market to rebound? Wouldn’t you want to make more money than what you bought it for?
Second, labour is going to increase due to inflation. Just like the rest of the workforce, construction workers also get cost of living increases. Not to mention that the demand for construction is or was at an all-time high, with the most number of cranes up in Toronto than anywhere else in North America.
Third, a lot of the materials are from imported goods, such as windows and steel, and the cost is skyrocketing due to the weakening Canadian dollar (from having to keep low-interest rates), and all the supply chain interruptions. As we start the trend of de-globalization and producing things in Canada, it’s going to limit the access to inexpensive manufacturing from other countries like China. That’s a direct input cost, which is known as hard costs.
Lastly, cities are broke, so they’re trying to get more revenue by increasing development levies. It’s kind of getting out of hand.
85 to 90% of the price of a new home are these costs that I just mentioned, which leaves builders with profit margins of only 10-15% or so. There’s no room for prices to come down.Supply and Demand:
So I just said before that demand for new construction may be pushed out a little further as prices are not going to come down and builders and landowners wouldn’t likely be selling at a loss. This means a slowdown in housing starts, and as immigration picks back up, inventory will be severely repressed. Once demand gets back to normal, I know that we are going to see competing offers again for the limited supply of housing stock.The psychology of sellers: Same with the landowners, most homeowners don’t want to sell at a price less than what they bought it for. So they just elect not to sell. This creates a cascading effect of lack of inventory, as people don’t have anything to trade in to. If downsizers don’t have anything to buy or that the price isn’t right for them to sell, then the upsizer can’t find a home to buy in to, so they’re not going to sell their condos, which closes the loop on first time home buyers as there’s no inventory for them to buy either. For the few homeowners that are on the brink of becoming distressed sellers, the banks have introduced mortgage deferrals.
Government tools:A lot of people are saying that we are going to be in a depression. Again, I’m not an economist, but I keep reading that this is an engineered recession, vs a complete financial meltdown. It’s not fair to compare this to the Great Depression, as the government and central banks didn’t have the tools and lessons that we have had now. I’m going to put it out there, and I’d be happy to bet you on this, that we are not going to go into a depression.
Hyper-inflation: Government stimulus programs are really expensive. There’s no way that our tax revenues will be enough to replenish a decade of deficits spent in a few short months. The Parliamentary Budget Officer is predicting that we will have spent $252 billion in Canada by the time that this is over. They are going to need to print money to pay for this, a lot of it. This is called Quantitative Easing. On top of the COVID-19 stimulus programs, there’s the ever-growing issue of debts and deficits. How is Canada (and every other country in the world) ever going to climb out of this hole and pay off the debts if we are run our budgets with a deficit every year? What the government has been doing is stealing from your future earnings by printing more money, essentially counterfeiting money, by debasing the currency. They’re just inflating the debt away. I think this is called Modern Money Theory, look it up. There are theories that this whole Ponzi scheme will come crashing down and we’ll go back to the gold standard or maybe cryptocurrencies, but the governments are not going to give away their control to print money. Maybe not in our lifetimes. Anyway, at some point we are not going to be able to service the debt payments, and this whole fractional reserve banking system is going to crash.
So by expanding the money supply out there, it’s just going to dilute your buying power. A thousand dollars in your hand today isn’t going to worth as much in the near future. Maybe this will lead to hyperinflation. Or maybe the deflationary pressures are greater than the government stimulus injected into the economy, so perhaps we won’t see it as much in consumer inflation in the price of our everyday goods, but for sure we will see it in asset inflation. I’m sure you’ve noticed, we have seen the effects of this for the past 12 years since billions were injected into the economy to support failing banks and industries in the financial market meltdown in 2008. Notice how assets are that much more expensive as compared to the average wage growth? This is going to circle back to that whole wealth gap discussion that I’m trying to avoid talking about, the gap between the haves and have nots… it’s a big problem.Immigration:
Canada is becoming a technology hub, with so much innovation coming from here. Immigration will be stronger in Canada, while the US is shutting down immigration. I think the number of H-1B visas for skilled workers is capped at 85,000 in the States, whereas Canada is something like 3 times that amount.New Industries:Speaking of technology, completely new industries will be created as a result of new innovation. Millennials will be shifting away from renting and into homeownership, as new jobs are created and as they make more money. Have you seen what some of the top young Youtubers make nowadays?
If you’ve watched this long already, I’ll give you a bonus. Here are some reasons that MAY contribute to a decline in real estate prices:
Eroding down payments: Collapsing equity markets have eroded an important source of down payments. If you took a 50% hit in the stock market where your savings were held, you’re probably not feeling like you want to cash out at a loss to buy real estate right now. That’s going to impact the demand of housing.
Slower rental market: Immigration has stalled, basically slowing down the population growth. For investors that purchased units pre-construction and are nearing completion, the pool of potential renters has shrunk in the near-term. This may increase the pressure of selling. Also in general investors.
Financial pressures of homeowners: Financial pressures may force some homeowners to sell their properties. However the mortgage deferral programs offered by banks may limit the number of households pressed into liquidating their homes through distressed selling.
Remember guys, all of this talk will have a hard stop once we find a vaccine for the virus. The entire world is united in finding the solution, people are saying that it’s at least 12 months away, but I’m confident in humanity. Life will go on. Until then, be safe, and I’ll catch you in my next video. If you want to talk more about this, please give me a shout. Don’t forget to comment on this video, good or bad, I don’t care. Just tell me what you think. Thanks for watching!