Last night, the Ontario government released a list of all businesses they consider to be essential during a Covid-19 induced shutdown-ish thing. Some doomsayers have told me the general economy has sort-of been ground to a halt. Some organizations seem to be salvaging with the ostensible “work from home” strategy.
The challenge with real estate is that it’s functionally impossible to do remotely. Sure, 90% of the transaction can leverage technology – but it is a physical good, and one that is far too significant for most people to purchase without touching and feeling it. If you want to see what happens when people buy at scale sight unseen, I would refer you to York Region’s resale and pre-construction market of 2017. It wouldn’t surprise me if foreign capital was as aggressively opportunistic in Canadian real estate this year, with a growing CAD/USD spread and flight to quality trend being leading indicators.
There is a pretty big spectrum of reasons that real estate services would be deemed essential right now, but I’m going to focus on three important ones. This all has to do with the fact that Covid-19 is becoming an economic problem as fast as it’s becoming a health problem.
- Real estate is the largest store of wealth in Canada
- Real estate (and mortgage registration) has a long-run sales cycle/supply chain
- Housing is a major economic driver in Canada
1. Real estate is the largest store of wealth in Canada
It’s no secret that the principal residence is a major contributor to the household wealth creation of Canadians. Housing has also provided a tax-free wealth storage, with a pretty reasonable liquidity, given the strong absorption of Canadian housing. Stifling that liquidity is something we can’t afford to do, as proven by 2017 legislature. Shutting that liquidity off completely would hold some pretty unpredictable consequences (I’m going to guess they’d be bad ones). Shutting off that liquidity while hurdling towards a recession (some say depression) would be, in a word, catastrophic.
I came across some interesting charts by savespendsplurge.com that illustrate this nicely:
2. Real Estate services have a long-run sales cycle
This is sort of a derivative of the necessity of sustained liquidity noted in #1. Basically, you especially can’t hold-up liquidity in the middle of a sales cycle. This becomes even more important when making considerations for the registration of mortgages on title, which I suspect quite a few people will be needing in the coming months. Furthermore, there are two important cycles that can take 60-90 days to complete, that simply cannot afford to be held up for any reason. Firstly, properties that have sold firm need to close. Secondly, buyers that have not sold need to sell.
This is also why I believe that if we do see a decline in real estate prices, it’ll take 45-60 days from the first drop in the financial markets, because that’s how long a sales cycle takes to factor the current environment into the market:
This cycle is essentially the supply/demand function that causes stocks to move down in price, but it takes months, rather than minutes. Stopping that process would not allow the market to run its course, which would soften the market, should a sell-off occur.
Compounding this, the growth trends of Canadian household debt leading up to this moment in time might indicate that access to that liquidity could become extremely necessary, and most likely executed by some instrument registered on the title of their property – hopefully one with their consent.
3. Housing is a major economic driver in Canada
I can’t understate the importance of this, and I think we’ll truly feel the impact of it once construction sites shut down due to the virus. Housing is, by some estimates, directly or indirectly correlated to 78% of our GDP. Even if that’s a stretch, greater than 50% of the growth in our GDP came from this category. If you combine the two prior points, you get something like a need for liquidity + a long-run cycle. Creating scarcity on either side of the already imbalanced supply & demand equation in Canadian real estate would be problematic. Stifled housing development could impact the supply chain of real estate just as drastically as any legislature could. I’m glad we’ve decided that people’s lives are more important than commerce, but I worry about our economy’s ability to weather this storm.