Toronto Home Prices in 2008 Financial Crisis vs. Corona Crisis (So Far)

While the Coronavirus (COVID-19) crisis is unprecedented, its impact on the real estate market can be seen in terms of demand and supply effects which tend to be more familiar. 

It's of course impossible to compare any two big historical economic events in order to try to predict the future because the events are never the same, but it can be helpful to compare and contrast in order to understand what is currently happening a bit better.

In the case of the current Coronavirus (COVID-19) crisis, it’s not just a major economic event we are faced with, but also a major public health risk, the latter giving rise to the former and both perhaps perpetuating each other in a vicious cycle.

When compared to the global financial crisis of 2008, precipitated by the subprime mortgage crisis originating in the U.S., the shock to Canada’s economy is far more significant today than it was 12 years ago and the response from all levels of government to help families and businesses has also been greater.

Recently, I talked to BNN Bloomberg about the current state of the real estate market in Toronto and Canada during this crisis in a wide-ranging discussion.

Leaving aside the bigger macro economic shocks and stimulus that will impact our housing market in the near future, I think there a few key “on the ground” differences that we need to keep an eye on as we try to assess what the impact of the current crisis will be on today's real estate market in comparison to past shocks.

The Positive

Over the next few weeks, I’m expecting both buyers and sellers to put their real estate transactions on hold as a result of COVID-19.

This means that both home sales and new listings will decline and if this is in balance, this may result in prices remaining relatively stable.

If prices were to fall, we typically need to see a sharp increase in the inventory of homes for sale relative to the number of sales, which we saw in both 2008/2009 as a result of the subprime mortgage led-financial crisis, and 2017, following Toronto's then real estate bubble.

In both cases, it was this spike in inventory that led house prices to fall, something we are not seeing right now.

The other positive factor and big difference from 2008 is that we are not getting any calls from panicked or distressed sellers who are eager to sell their homes as quickly as possible and at any price due to financial pressure. Given that our company, a real estate brokerage serving the Toronto area, works directly with buyers and sellers every day, we typically see these human/behavioural red flags on the ground well before they appear in the actual housing statistics.

And as of today, we are not getting any calls from anxious sellers.

Now, this may be because government and industry measures to ease financial burdens, such as deferring mortgage payments, are able (or anticipated to be able) to alleviate pressure and in other cases financial impacts are not being felt yet by some home owners.

The Negative

The one big negative that makes today different from the financial crisis is that Canadians are far more indebted today than they were twelve years ago. High levels of debt can hurt the housing market in a number of different ways.

Firstly, in the past five years, many Canadians needed to borrow more money against their home than big banks were willing to lend them. Many of these home owners went to the private mortgage market to borrow against their home, something I wrote about in a report with Teranet.

Given the economic uncertainty, I'm hearing from mortgage brokers that private lenders are choosing not to renew mortgages which may force some homeowners to sell their homes if they cannot pay back the money they borrowed from the private lender.

Just as important is the high level of debt and financial stress that renters are faced with. Renters are going to struggle to pay their rent in the short term and this may put downward pressure on rents and push vacancies up, which may stress the investors that own these properties.

It will be important to keep a close eye on weekly market numbers in this quickly changing situation and to this end, I've just launched a new weekly update taking you through the latest numbers and their implications, which you can follow on Instagram and Facebook.

Image Credit: Ani_Ka, Getty/iStock

John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.

A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).

Follow John on Twitter @johnpasalis

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