Market recovery outpaces 10-year average
Homebuying data from the Canadian Real Estate Association shows national home sales and new listings continued to climb in August 2020, after two months of consecutive growth. This “V-shaped recovery” shows the real estate market still hasn’t fully compensated for the loss of activity in March and April, but the market recovery is well on its way.
Nationwide sales activity was up 33.5% year-over-year in August. This was a new record for the month of August and the six-highest monthly sales figure of any month on record. August sales far exceeded the 10-year monthly moving average, as shown in the following chart:
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Source: Canadian Real Estate Association, National Statistics, September 15, 2020, https://creastats.crea.ca/en-CA/. Accessed October 5, 2020.
Based on the data, it appears transactions were up in almost all Canadian housing markets, though the majority of the gains were in the Greater Toronto Area and British Columbia’s Lower Mainland. Data from the Toronto Regional Real Estate Board confirms this, but shows most buyers are choosing to live in the suburbs, as the sale of detached homes in the 905 area far outpaced that in the 416 area.
Digging into the sales data, younger families are driving this trend, according to Ryerson University’s Centre for Urban Research & Land Development. Millennials are increasingly trading the city for the suburbs, and this demand for ground-related housing is increasing at the expense of the condo market.
Overall, new home sales are driven partly by pent-up demand (following three months of inactivity), and partly by affordability as interest rates are extremely low. Lower rates make it easier for younger families to take out mortgages on detached, ground-level housing in the suburbs. This lifestyle is more appealing, to some, because it comes with a larger living space and potentially more opportunities for outdoor living.
Sales expected to moderate
It’s unclear how long these record-setting sales will continue, as younger Canadians are disproportionately affected by the pandemic. Ipsos poll data from the month of May shows that COVID-19 disrupted employment for around 35% of Canadians, but this figure rose to 48% for those aged 18 to 34. As mentioned above, younger homebuyers also need to contend with the long-term trend of rising home prices and shrinking household budgets.
Another word of caution on the Canadian real estate market comes from the ratings agency Moody’s. An update sent by Moody’s Analytics to its clients in September forecasted prices will decline towards the end of the year. Although there are different scenarios (based on employment data and economic recovery) all of them forecast a drop in late 2020 as the real estate market settles.
Builders can help first-time buyers by balancing function and space
At the outset of the pandemic, data from the CMHC revealed that starter homes in Canada’s largest markets were likely to be condominiums or townhouses and not detached houses Starter homes are also less likely to have a yard, and if they do, it’s a smaller yard. As density goes up, this helps builders control costs and focus on the functionality that millennial buyers are looking for. Unfortunately, this puts buyers’ interests at odds with those of the respective builders.
There were already signs that some millennials were opting for the suburbs before the pandemic. Late in 2019, Royal LePage forecast this trend would increase Canadian home prices by 3.2% in 2020. The firm also expected price appreciation in the condominium segment to cool in Montreal, Ottawa and Toronto, because the price gap between condominiums and single-family homes was narrowing. Around the same time, ReMax also suggested in a blog post that outdoor living space and smart home ready options topped the most desirable features for millennials.
All of those trends not only materialized but accelerated during the pandemic – more younger families opted for the suburbs, leaving condominiums behind. With the advantages of city living lessened during the pandemic, and more people working from home, a growing number of home buyers preferred to wait out the pandemic in a larger, more comfortable living space.
The market for purpose-built rental housing in Canada is also affected by the pandemic. Although many millennials continue to see it as a more affordable option than buying a home, they might be less willing to pay the higher rents of dense, urban areas. For the renters that work from home, it is now less important to pay for ready access to their workplaces, and perhaps more important to pay for amenities that make their isolation more enjoyable.
From the perspective of builders, one option to make rental housing more viable is to incorporate amenities and services that are important to renters, and that could help make up for a smaller living space. Developers are increasingly diversifying the services that they offer, and rather than just adding retail spaces on the ground floor, they are also including community centres, daycares and green spaces. Together, these changes help make cities a more appealing place to live as they are increasingly competing with suburbs for families and first-time homebuyers. They also recognize the importance millennials attach to public spaces and outdoor living, despite the challenges introduced by the COVID-19 pandemic.
Bridging the gap
At Grant Thornton, we understand the dynamics of this market – and the needs of the growing number of potential millennial homebuyers. Millennials are facing significant affordability challenges in the housing markets, but they still want to buy a home and many have made the leap while interest rates are low. Builders want to meet this demand, and can do so with savvy balancing of price, functionality and features.
Misconceptions may be creating barriers to homeownership among Canada’s largest generation. Talk to us and find out how our advisors can help bridge the gap in this area for buyers and builders alike.
