Congratulations. The Covid-19 curve has flattened in Canada, and in many countries around the world, and it is finally time to return to work.
That is good news, but are we facing a worldwide economic crisis, and if so, what should we do?
There are many opinions out there and no one really knows for sure, however, when it comes to GTA real estate we should be guided by the economic fundamentals that are driving the market, and history.
We know what happened in the last worldwide financial crisis, the banking crisis, that ran from the fall of 2008 to the fall of 2009. Those that had invested in the stock market lost 40 percent to 60 percent of their equity and in the midterm, the stock market grew back stronger than ever.
In the residential, resale real estate market the volume of sales dropped drastically due to a lack of consumer confidence which resulted in a shortage of listings, less of a shortage of buyers, and a market value that increased year over year.
There was a similar result in the new home and condo market.
So, we learn from history that in a crisis, real estate is the safest place, by far, for our money.
Many clients are currently asking me what will happen in the residential, pre-construction market. Will prices come down?
This is a very good question and history and the fundamentals should provide us with a confident answer.
We know that there is a shortage of zoned residential land to build on and we know that the market is being driven by very healthy immigration, record low-interest rates, and a lessening of the stress test regulations.
Experts agree that these fundamentals will not change in the midterm.
Many developers will be postponing the launch of their new projects to wait until consumer confidence returns, and this could realistically be 2 to 6 months.
This action further reduces the availability of properties for sale in a market that is already suffering from a shortage of inventory, which in turn creates a vacuum.
In the short term, wise consumers will choose to buy in projects that are more than 60 percent sold or under construction because they can strengthen their confidence knowing that these projects are far enough along that they will be built.
New projects cannot lower their prices or they will not be building. Here’s why.
The cost of labour, materials, lot levies, and zoned residential land are all at record highs.
A senior, industry inside source tells me that the trades and the suppliers have no intention of ever reducing their prices.
The carbon tax increased by 50 percent on April 1 and since the cost of producing steel, concrete, glass, and drywall requires a lot of energy, and it also requires a lot of energy to deliver the material to market, there will be a small increase coming in the cost to build, and the cost to buy, new construction residences.
Currently, politicians are only in a position to raise taxes and the shortage of land only compounds itself over time, since we cannot create more land.
The developer’s construction financing banks require a performa (or budget) that shows a certain profit. If there is not a profit the banks don’t lend and the project will not be built.
Due to the high cost of construction, developer’s profit margins are surprisingly low and there is simply no room to lower prices so developers will have to wait for slower sales, in the short term, to build.
So, downtown Toronto projects that were selling out in 30 or 60 days may now take a year to sell, in the short or mid-term, until consumer confidence returns to the marketplace.
The vast majority of residents hurt by the quarantine are the working poor who live paycheque to paycheque.
Many people continued working, worked from home, were paid to stay at home, are receiving social assistance, or are on retirement pensions.
The government provided $40,000 interest-free loans ($10,000 forgivable) to many businesses and $2,000 CERB (Canada Emergency Response Benefit) payments to many workers.
The wealthy, who have healthy equity in their homes or investment properties, are in a strong position to mitigate their Covid-19 losses with refinancing.
People who have invested in the stock market or do not own real estate should position themselves for success, and to have the peace of mind that financial security brings, by understanding economic fundamentals and history.
The volume of sales will be reduced in the short term with mild price increases, but three years from now, buyers will not be able to afford the same size of property in the same location that they can today.
Today, I will be buying.
Scott Davie, President of Davie Real Estate, has been a leader in the sales and marketing of new high rise and low rise projects around the GTA for over 30 years and has represented many of the GTA’s top developers. Davie recently wrote what has been called the definitive book on the GTA Affordable Home Ownership Crisis. Thanks to generous Industry sponsors the magazine style book is available to download and read for free, for a limited time, at AffordableHomeOwnership.ca