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Impact of COVID-19 on large and small real estate markets

The COVID-19 pandemic presents an interesting dynamic for various sectors of society. Quite different from any of the previous financial recessions, this pandemic has caused widely varied impacts across sectors, having worse effects on industries that require in-person interactions.

For example, while the income and shares of cinemas are plunging due to reduced patronage, the market value of Netflix continues to rise at astronomic rates, with a 14% increase in stock value this year as more people use it while stuck at home.

The impact of the pandemic on the real estate market is also relatively complex, leading to varied impacts on different Canadian cities.

COVID-19: A new driver of Real Estate in Canada

Over the last decade, the main drivers of real estate in Canada have been a constellation of factors like low unemployment rates, low interest rates, and increased influx of immigrants and foreign investors into Canada. With the combined effect of these factors, the real estate market has become a main investment choice for the average Canadian family, especially because of the high prospective returns.

Government has done a great job by providing different programs such as the mortgage deferral program to minimize the adverse impacts of the pandemic on the real estate market, and also the low mortgage rates in Canada decrease the cost of home ownership. However, this pandemic will have a significant impact on the real estate market because of its effects on unemployment rate and immigrant influx. For example over 1 million Canadians lost their jobs in March 2020. As well, the inflow of immigrants has been all but barred with border closure. How does this play out in different Canadian cities?

How COVID-19 has impacted the Real Estate market in large Canadian cities

The impact of COVID-19 on the real estate market in large Canadian cities is definitely related to its effects on the smaller neighbouring cities because of the populations that are commuting between them. For example for the Toronto real estate market, Milton and Aurora are also considered due to their proximity to Toronto.

Big cities like Toronto are already experiencing the negative impacts of the pandemic due to earlier discussed factors like reduced immigrant influx and loss of jobs. This is because many jobs in these cities, both small and large businesses, are related to hospitality which have been profoundly affected by the pandemic. High employment rates decrease the mortgage affordability for many in these cities. With fewer jobs available in the big cities such as Toronto, Vancouver, Montreal and Calgary, there would be a significant drop in the number of people leaving other cities in Canada, to reside in these large cities.

Owners of small businesses have been hit hard by COVID-19 as it has forced non-essential service providers to stay home. Hence, these individuals who otherwise formed a solid base for the purchase of real estate, have had to redirect their funds, with little left for capital purchases like buying a house. Also, because no one really knows when the pandemic will be over, people are favouring liquidity and are less likely to tie their funds down in investments until the dust clears.

As well, many of the properties being used for AirBnB in large cities like Toronto have witnessed a sharp decline in patronage, and have begun to count their losses. This might result in them being available for rent or sale, further saturating a market that has begun to experience a drop in sales.

With these adverse effects of the pandemic on real estate in large Canadian cities and the smaller cities which border them, we should expect a decrease in both volume and prices of homes there.

How COVID-19 has impacted the Real Estate market in smaller cities and towns

For smaller cities that are farther than 200 km away from larger cities, the affect of COVID-19 on their real estate industry may not be so significant.

This is because factors like the influx of immigrants or a large hospitality sector haven’t been key drivers of real estate in these smaller cities prior to the pandemic. Instead, these towns attract only a small number of immigrants and gains made from the hospitality industry are incomparable to that for large cities.

Small business owners in these cities will still suffer from the reduction in patronage that is affecting larger cities, and the tourism industry will also be impacted negatively. But in contrast to large cities, some small cities have economic dependence on agriculture and dairy, and these commodities still will be consumed in spite of the lockdown/restriction of movement. Predictably, the prices of these products may increase significantly over the next 12 months, further boosting the economic standing of these relatively smaller cities and resulting in more cash being available for home purchases in these cities.

Also, because of the high unemployment rate in many large cities, the flow of immigrants from these smaller cities to the larger ones will decrease significantly. As such, smaller cities may be able to navigate COVID-19 successfully without severe impact on their real estate industry.

COVID-19 is an important driver in the Canadian real estate market

COVID-19 has become an important driver of the real estate market in Canada, just like its severe effects on other industries. However, due to a myriad of factors like the varied impact of unemployment and immigrant influx on large and small cities in Canada, the real estate markests in larger Canadian cities are likely to be more profoundly hit by the COVID-19 pandemic. Hence, smaller Canadian cities that are far from these big cities are likely to have fairly stable real estate prices and volumes during and after the pandemic, while cities like Toronto, Vancouver, Montreal and Calgary may witness market changes in their market prices and volume of purchases.

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