In this month’s newsletter we have analyzed: (1) what occurred in the months of April and May and (2) where we think we are headed short-to-medium terms, and (3) the headwinds we may encounter.
1) Quick fact checks for the months of April and May:
In the height of the pandemic and economic paralysis that followed, the real estate market stopped in its tracks. The long-awaited crash however did not occur. The main reason for this is purely the correlation between supply and demand fundamentals.
Yes, sales volume collapsed. In fact, existing home sales volume dropped the most on record. Inventory levels however dropped at exactly the same pace, so home prices remained stable.
Demand in April was mostly fueled by buyers who had sold their properties in January and February and who were caught off guard by the onset of the pandemic in March.
Confidence and a certain degree of enthusiasm took hold. Sales were up by 53% and prices noted a 4.6% gain month-over-month
Although this is a positive sign that could indicate that a recovery may slowly be on its way, we are by no means back to market conditions experienced in previous years. To put the stats into perspective, are still only at 50% of the sales volume experienced in May 2019. Essentially, we are working in half of a market.
2) Our short-to-medium term outlook:
We feel that the demand in housing for the month of June, July and August will remain strong and consistent for two reasons:
(a) due in large part to the delay of the “spring market”. Slow market conditions in the late part of March and the month of April will fuel demand throughout the summer months (essentially demand was pent up and postponed). Inventory levels will more than likely stay limited which will continue to put upward pressure on home prices and
(b) the tightening of mortgage rules, taking effect on July 1st, will cause a number of buyers to accelerate their buying decision in order to avoid more stringent mortgage qualifications.
3) Potential headwinds and risks:
a) the same tightening of mortgage rules will put a damper on first time home buyers and buyers who are highly leveraged past the July deadline.
- buyers will need a credit score of 680 up from 600 in order to qualify
- the gross debt service ratio will be reduced from 39% to 35% of income.
b) the potential threat of a second wave of the pandemic, with its economic consequences, would most certainly derail (or at least delay) the real estate recovery as this would be a severe hit to market psychology.
It is our team’s opinion that the next few weeks will be a good time for sellers, who have been sitting on the sidelines, to list their property. We consider this to be a window of opportunity fueled by good weather and a recovery in the stock and labour market.