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As Victoria works to limit the carnage from the pandemic, here's a look at what we'll be piecing together when this is all over
COVID-19 is now driving Vancouver Island into partial lockdown. Care homes are barring visitors, the cruise ship port is closed and everything from ComicCon to professional sports has been postponed indefinitely. Whatever is to happen, it will eventually pass and we’ll be left to assess the damage of one of the most comprehensive economic shutdowns of modern times. The Capital got its resident real estate numbers guy, Leo Spalteholz, creator of the blog House Hunt Victoria, to weigh what the effect will be on the real estate trade.
The stock markets have been absolutely hammered in the last couple weeks, with value drops also coming for resources, gold, and Bitcoin. But what of the unstoppable force: Victoria real estate? Before COVID-19 reared its head, Victoria real estate was actually on the upswing after nearly two sluggish years. Sales are up substantially in the last few months, and that was all but guaranteeing us moderate price increases this year. Bidding wars are back in the under-$1 million market, with one in four single family homes selling over their asking price in the last 30 days.
The situation is changing daily, but as of the last 7 days of data, new listings are down 9% from this time last year while about the same number of properties sold as a year ago. Just a few days ago though those numbers were much stronger, so there is evidence the market is starting to react
Impact from coronavirus on the real estate market can be divided into three segments: Short term, medium term, and long term, all of which are very different and the length of each of these stages depends on the severity of this virus outbreak. Canada may manage to control new cases relatively quickly, or this could still morph into the overwhelming situation currently hitting Italy. No one knows at this point and the outcome depends largely on everyone in society doing their part to minimize transmission by social distancing and following the up-to-date directions from the BC Centre for Disease Control. We can already see that the outbreak is taking different paths in different countries and it's too early to tell where we will land on the spectrum.
In the last few days we've seen a dramatic shift in attitudes from "it's just a flu" to "wow, this is serious." In Seattle, which is a bit ahead of us in terms of the outbreak’s progression, reports are that real estate listings are starting to get cancelled. Looking even further ahead of the curve, property sales in Seoul crashed by 90% during the height of their outbreak. It's clear that if Victoria's experience of the pandemic worsens substantially, real estate market activity will be hit hard.
The cruise season is almost certainly done for the year, with the feds just now banning all cruises of more than 500 people until July, and flights are being cancelled in droves, which will further reduce the city’s annual influx of tourists. BC Ferries, similarly, will also almost certainly see a drop in traffic in the coming months. That means thousands fewer tourists leading to millions of dollars in missing tourism spending for the local economy. According to the website Inside Airbnb, there are approximately 3,400 Airbnb listings in the Capital Region, with 2,650 of those being whole home rentals. Without as many tourists, those Airbnbs will be largely empty (bookings in other regions are already plunging).
Many of those short term vacation rental hosts will weather the storm over the summer with lower returns, while others will look to sell their units, and others will consider taking on a long term tenant instead. An influx of longterm tenants would bring some much needed condo inventory to the market and help our extremely low rental vacancy rate, although once the crisis passes these units may simply return to vacation rental use.
It seems likely that the sectors most dependent on tourism will be the hardest hit by COVID-19. Retail, accommodation, food services, culture and recreation make up about a quarter of the employment in Victoria, and that is where we may see some job losses (or simply a lack of seasonal hiring) going into the summer. Public administration, health, and education should be relatively safe, while some manufacturing and construction may be slow due to supply chain disruptions. Luckily, this hit comes at a time when our unemployment rate is the lowest in Canada, making it likely that we can absorb some losses by filling open vacancies before the unemployment rate rises too much.
Prices in Victoria have historically remained high regardless of the economic situation around them. Even in the very slow market from 2010 to 2013, prices only drifted downwards at a rate of about 2% per year. Most Victorians listing their properties do not really need to sell and if buyer interest declines, they will simply take their listings off the market and wait for better days. However, there is a smaller group that absolutely needs to sell at any given time, whether that is due to a death, moving away from Victoria, or changing financial circumstances. During a demand shock the number of buyers can drop below the number of people that must sell, driving prices downward quickly.
We do have a recent example of the last time a demand shock hit the Victoria market combined with an increase in unemployment: The Great Financial Crisis of 2008. In the fall of that year, while the TV was blaring about banks going under and stock markets crashing, anxious buyers stayed home and sales numbers crashed, while at the same time some sellers still needed to liquidate. The impact on Victoria real estate was brief but sharp, with sales dropping over 50% from the year before and prices declining nearly 10% from the peak 8 months earlier. Note that we have no evidence yet that the demand shock due to coronavirus will be this bad, but it remains within the realm of possibility.
It's important to remember that no matter how bad the short term impacts are, this is a temporary crisis and it will pass. Even the more pessimistic epidemiological forecasts have the pandemic smoldering for about 12 months before it can be beaten back with a vaccine. The medium term time frame will start after we bring down the number of daily new cases and it becomes clear that we are over the hump. China and South Korea may already be there; the rate of new cases has slowed down and they appear to be through the worst of it. When we see this in Canada, people will start to relax and economic activity will begin to return to Victoria. There may even be a bit of a surge of activity to compensate for the previous slowdown as the economy catches up on lost time.
After the acute period, impacts on the housing markets will largely be positive. Interest rates have been cut by an incredible 1% since March 1 as the Bank of Canada has sought to offset the economic pain from the virus. To get an idea of the impact of that, on a $800,000 home purchased with the minimum down payment, a cut of 1% in rates means your monthly mortgage payment is reduced by about $370/month.
One interesting difference in the government approach this time (as opposed to the Great Financial Crisis) is that policymakers are trying to avoid sparking a rush to real estate. The mortgage stress test was scheduled to be relaxed in April which would have increased buying power even further, but that has now been put on hold. The Canadian Mortgage and Housing Corporation's president, Evan Siddall, tweeted that “deferral of new mortgage interest stress test benchmark will help direct monetary stimulus (rate cut) towards highest economic productivity and away from increased house prices." In other words, they are hoping the rate cut will stimulate the rest of the economy, not just inflate the housing market. However, once the virus is in the rear view mirror, lower rates alone should cause a rush of sales to come back to the market.
Once again we can look at what happened during the 2008 financial crisis, where the central bank reacted in the same way by drastically cutting interest rates to stimulate the markets. After the sharp downturn, sales and prices in Victoria rebounded quickly.
Once the short term shock clears, the market and we see the rebound in demand come through, we enter into the long term impact of this event. Eventually, when the Bank of Canada sees enough economic recovery, they will raise rates again and remove any emergency stimulus that they have in place. Then we will return to the same fundamentals we had in place before the virus hit; we’ll have roughly the same number of people competing for the same number of homes, and our housing market will be back to being mainly driven by our ability to build enough new supply and the buying power of our population.
At this point there are still many unknowns in the COVID-19 situation, both in what the virus will do and how the government will respond. If it goes very badly we could see substantial deaths which would hit the market, but that’s a grim math I’d rather not think about. So far, we’ve seen the Bank of Canada lower interest rates, but what if the government just starts handing out cash to everyone like they did in Hong Kong? What if they suspended mortgage payments like they are doing in Italy?
These are uncharted waters, and no option is off the table yet. What we do know is that the severity of the impact depends largely on how we respond as a society going forward. Stay safe out there.
Read more of Leo Spalteholz's real estate analysis at House Hunt Victoria.