North American real estate has always been seen as an amazing investment opportunity, attracting people from all over the world. Has the pandemic affected this in any way?
In 2020, the economic impact of the COVID-19 pandemic coupled with the effects of physical distancing are seriously affecting the real estate market, as with other asset classes. Unlike investing in the stock market though, real estate has much less liquidity and the prices are moving at a slower rate. Therefore, it will take more time to understand the full impact of the pandemic on the real estate market.
Here are some effects of the pandemic on North American real estate so far:
1. Reduced Cost of Owning a Home in North America
Currently, mortgage rates in Canada and also the rates in the United States are very low, and this will not change much within the next two years. This translates to a lower ongoing cost of owning a property.
This ought to be good news, but there’s a catch: to get a mortgage, you’d have to show that you can make regular mortgage payments. Doing this requires you to have a regular source of income and for many people, their jobs and finances have been hard hit by the pandemic. As of May 22, 2020 up to 43 million people may have applied for jobless benefits in the US.
As such, while the ongoing cost of owning a home is now cheaper, the financial ability to do so is simply inadequate for a lot of North Americans. For example, mortgage affordability in Canada was an issue even before this crisis because of the significant rise of home prices in Canada and now the low unemployment rate makes many of them even more unaffordable.
2. Reduced Income of North Americans
Job losses and pay cuts have become the new normal for a lot of North Americans. Of course, this means that many people aren’t as keen to buy houses as in past years.
While larger cities or more touristic areas are harder hit by the pandemic, smaller areas that rely mostly on agriculture and essential products e.g. dairy products might not be significantly impacted.
A small city that is non-reliant on the hospitality industry for example, will feel less impact than Las Vegas which mainly relies on tourism for the growth of its economy. As major income sources aren’t affected by the pandemic in these smaller cities, their real estate market might witness such an immense decline as observed in larger cities.
3. Reduced Immigration and Desire to Move to Crowded Cities
Large cities like New York, Los Angeles would need to prepare for lower demand for real estate as the desire for people to live in crowded cities continues to go down because of the pandemic. Besides, a lot of residents there have lost their jobs and some may move out of these cities if they don’t get new jobs there.
Other cities like Toronto and Vancouver which are major destinations for over 300,000 immigrants yearly need to brace up for less demand for real estate this year as the pandemic is likely to cause a delay in processing the arrival of immigrants into Canada.
Conclusion
In spite of lower mortgage rates and consequently the reduced cost of owning a home, the reduced income of North Americans, less desire to live in crowded cities and reduced number of people immigrating to large cities all lead to a lower demand for North American real estate.
However, as many of the changes taking place in the real estate market due to the pandemic are gradual and slower than other asset classes, it would take more time to fully know how the pandemic will impact the real estate market.
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Interesting related article: “What is the Coronavirus?“