Not the Best Time to Buy a House?

Ruth Saldanha: Not even the pandemic has been able to slow down the Canadian housing demand, which is on track to end the year with prices even higher than the highs of January and February. In fact, even Toronto, a city that UBS says has one of the greatest housing bubble risks of any major city in the world, has prices that are up 11% from last year. This despite ever-rising individual debt levels and a slowdown in new immigrants who were thus far a major driver of demand. What does this mean and where do we go from here. John Pasalis, President of Realosophy is here today to share his thoughts.

John, thank you so much for being here today.

John Pasalis: Thanks for having me.

Saldanha: What is driving some of this demand and these price levels.

Pasalis: So that's a great question. I mean, I think the key thing is to remember what the starting point was in the GTA's housing market pre-pandemic. And in January and in February of this year, basically the first quarter, the housing market was on fire in Toronto, it was unbelievable demand, very competitive prices. And COVID basically just hit the brakes on it and things really slowed down in April and May. What we ended up seeing and I think a lot of people had a hard time predicting was that these recessionary effects that job losses disproportionately impacted renters did not impact the people who were active home buyers as much. So what happened is people just – all just jumped back into the market in June, so you had this real big surge in demand in the second quarter, and on top of that you have this – you created this new – COVID created this new demand of people who wanted to leave condos or leave small houses downtown and move to larger homes, bigger backyards. They are working from home; they are staying at home. They just felt like they needed more space. So, it really was the combination of like just a normal strong demand that just jumped back into the market plus this new demand that jumped in as a result of these COVID effects that we're seeing in the market.

Saldanha: You mentioned people moving out of downtown. Do you see this as being a shift in overall trends in terms of what people are buying and more importantly where?

Pasalis: Yeah, that's probably one of the big shifts in trends that we're seeing, it's like a behavioural trend, it's a behavioural shift that people are moving away from downtown condominiums kind of make sense, I mean, one of the reasons people are living in downtown condos is because they wanted to walk to work and enjoy all the amenities that downtown had to offer. Well, you're not walking to work, you're just working from home.

All the restaurants and clubs are closed down. So, there's no real reason to be down there for a lot of people. And plus, they want more space, a 500, 600 square foot condos, probably too small to live and work out of. And we're seeing very similar trends, even with houses, dual-income households two, three kids at home, there's small semis for many people are a bit too small. So, the big shift is people moving to the really far outer suburbs. I don't even mean like the suburbs, I mean, you know, Barry, Guelph, East Gwillimbury, like, far, over 1.5 hours out of Toronto, and many people moving to cottage country permanently, interestingly enough.

Saldanha: Is this sustainable or even normal?

Pasalis: I mean, no, it's not sustainable. I mean, I think a lot of people were looking at this rapid growth in sales and prices and we're thinking, Oh, my God, this is a bubble. I mean, and two important things to keep in mind is that the surge in sales, really, in the third quarter is just a carry over the fact that there are basically no sales in the second quarter, right. So, it's just this exhaustion, a shock that kind of messed up the sales cycle and has resulted in this spike in sales. And similarly, the price growth we're seeing, I mean, there's two things to that; number one, when we see really high double-digit price growth, it's really skewed by the fact there are way more low-rise homes selling than condominiums and low-rise homes are more expensive. But even having said that, we're seeing rapid price growth in these really far outer suburbs that normally didn't get bidding wars, where prices were not rising 20% per year, especially cottage country. And I don't think that's sustainable. I don't think those price growth will keep going and it's probably making those markets a little bit more vulnerable.

Saldanha: I guess a question on everyone's mind is that with something like the pandemic and the volatility around that not slowing demand, and then prices rise: what needs to change before we might actually see a correction in prices?

Pasalis: Well, we are starting to see a slowdown and prices, but we're seeing it gradually. So, we're seeing it in rents. So, rents are down more than 10%. In the downtown core, they're down 15% probably or more. And we're starting to see a slowdown in demand and a surge in inventory for the condominium market, right. So, we have the condo market behaving very differently from the low-rise single-family home market. They're doing very completely different things. So, we're starting to see a lot of inventory and potentially some pressure on prices in the condominium market right now.

Saldanha: Well, in which case are condos a good bet both in terms of renting right now as well as potentially buying from an investment standpoint?

Pasalis: So, if you are a renter, I mean – yeah, I mean certainly there is a lot more value now, because rents are down 15% to 20%, and it's a not bad deal. I mean would you spend $600,000 to buy a condominium or just rent that same condo for $1,700 or $1,800 a month. I mean $1800 a month is not lot like a bad deal, which means that for investors, it's probably not the best time to be buying. I mean you're paying – you know yesterday's or today's peak prices in a market where rents are down 15% - 20%, so why – I mean why would you rush to do that? So, I don't think it's a market for investors right now. I mean I think if you are investor, you just sit tight. You hold your assets. You know, you take the slight decline in rents and you move on. But it's not – it's certainly not the time to be rushing in and buying – invest in condos right now.

Saldanha: From a non-investment standpoint, what should potential homebuyers do right now?

Pasalis: You know I think the key thing is – I mean you want to be – like always, you want to be buying for the long term. So, I mean, you know, you don't want to be buying the 500 square foot condo if it's not going to be your main residence for 5 to 10 years. You know, I think, even people who are looking into the condo market, there are some buildings that are probably going to be safer. If you are buying a lower-rise building, a unique building or unique unit, two-bedrooms, you'll probably be better off even if we do see downward crash on prices and I think similarly, or I think the key thing now is just obviously not astute to overextend yourself and to make sure, you're able to finance and carry the property over the long term. I think that's the key thing especially given the uncertainty economically in the next year or so.

Saldanha: That makes sense. Thank you so much for joining us today, John.

Pasalis: Thanks for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.