That we are in the midst of a slowdown with Canadian Real Estate is indisputable at this time, and we all know that both inflation and the rise in interest rates are playing major roles in that. But what is both interesting and concerning – depending on where you own a home or where you’d like to buy or invest in one – is that homes in suburban regions may be taking much more of a hit than ones that are more within city limits. This of course has everything to do with demand for urban living continuing to insulate the market there more, but there is more to it than that.
This is even more relevant with the way that so many people have bought and moved into homes that are far from those city limits over the last 2+ years, and the reasons they did so don’t need any explaining here. What may need explaining though is a much more detailed why as to those houses losing value more quickly than their metro counterparts. Any type of downturn has serious ramifications, and it is not just the homeowners who will feel the pinch if they must sell soon for whatever reason.
There are real estate agents who work primarily in these suburban regions, and what happens when home values in an area drop significantly is that homeowners who were thinking about selling now choose to postpone that move and see what happens with the markets some ways down the road. That means fewer homes for prospective buyers too, even though there will be more of them than sellers given the opportunity to pay less for a home. Business can dip, and for realtors who are concerned about new clients in this way our online real estate lead generation system here at Real Estate Leads is a smart choice.
This is a relatively new phenomenon with suburban home values being considerably more at risk for falling values that urban homes, so it makes sense for us to look at it in more detail.
Smaller City Slowdown
What we are seeing now is that during the COVID-19 pandemic the gap between downtown real estate and houses in the suburbs has closed significantly. What this does is create a marked change from the way things have always been.
The workings of that are unique to this occurrence and perhaps this time in human history, and it is likely that this trend will be occurring in other countries too. Whether or not they occur in countries that have so much of their personal wealth and National GDP in real estate is a different question, especially as no other country has painted themselves into a corner in this way quite like Canada has.
But to the working themselves; the cost and inconvenience of commuting is typically a downside to suburban living, but as working from home became the norm for so many people during the pandemic that old standard came to change quickly. It’s been well detailed how so many people took advantage of this new working arrangement and chose to buy cheaper – and often better fitting – housing outside of the city.
House prices did take off just about everywhere during the pandemic, but the gains were definitely largest in the suburbs. What that did was make them less affordable today than at any time in the past.
Comparison
In 2016 a house in the suburbs located 50k outside of downtown would on average be worth around 33% less than a similar city home. If we look at 2019 even that gap had slimmed to 26%, while at the same time the bank was calculating that the average cost benefit had diminished all the way to just 10% for the end of 2021.
Again, this was driven in large part by buyers moving farther away from the city as needed until they would qualify for a mortgage based on the local home prices, a phenomenon that the industry began to call ‘drive till you qualify.’ Also factoring in was the same FOMO that has been going on for years, with people believing that home prices were never going to fall and some people saw the need to get in before new mortgage stress-test rules came into place nationally.
The trend has changed though, and it is not uncommon now for workplaces that previously embraced working from home to now being insistent that staff return to the office at least part of the time. This factors into the housing market quite directly, as suburban markets that saw outsized gains during the pandemic are now experiencing price declines while the metro city housing market holds fairly steady.
This may be a blip, or it may be a situational outgrowth of the trend of home prices cooling more than before due to BoC rate hikes and other known factors. The Bank is not offering much to work with to this point, but it does believe the narrowing price gap between the suburbs and downtowns could become a problem if preferences shift back toward the way they were prior to early 2020.
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