We’d been worrying for years. A housing crash was coming, and it was likely to happen during the next recession. Before the pandemic, economists around the world warned that a crash was imminent. Canada would likely see a huge reduction in housing prices, as sales reached record highs.
But then, the pandemic hit. At first, many economists believed this would cause a housing crash immediately. Yet, it didn’t happen. In fact, housing prices continued upwards, both in the major Canadian cities and even in the smaller locations as well.
So, what happened?
A seller’s market
The Canadian Multi-Listing Service (MLS) system showed that in the first 10 months of 2020, a whopping 461,818 homes were either bought or sold. This was up 8.6% compared to the same time last year and the second-highest level ever just after 2016. But the year isn’t over yet. We could actually see the highest number of housing activity ever!
Yet there are two reasons a housing crash didn’t happen, and both have to do with the pandemic.
The work-from-home economy
People are realizing just how tight their space really is during a pandemic. When you have kids at home, trying to work from home seems pretty much impossible. Wouldn’t it be great to have a finished basement to stash them away? You’re not the only one who has had these thoughts.
People working from home have been the ones driving this change in housing situation. In cramped spaces, many are looking to upgrade. That’s especially true in places like Toronto and Vancouver, where a measly 500 square feet costs about $300,000!
No flood of houses
Yet despite those people wanting to upgrade, there are far fewer looking to sell. That’s because the whole process is a headache at the moment. With a pandemic, you can’t have the open houses you once had, and where are you going to go while your home is sold? And even with precautions, what if someone is sick? Many people are choosing to wait it out.
That leaves those willing to take the risk in a prime position to take advantage. With fewer homes on the market, there has been a sweep of home sellers putting up homes for way less than their worth, and seeing the offers flood in far above the asking price. But this could soon change with the change of the seasons. There’s already been a steep decline in inventory. In fact, inventory is now at 2.5 months of sales, which is the lowest level since 2003.
So, the pandemic at least was fueling the housing industry, but a housing crash is still likely. By the beginning of 2021, the average house price could drop by about $100,000 across Canada. This leaves many investors wondering whether their stable real estate investment trusts (REITs) are all that stable any longer.
There are two things to consider. First, is the REIT you’re invested in likely to be swayed by a housing crash? Or is it invested in other properties? This should keep revenue strong, though it’s good to see how the pandemic could continue to shift revenue. Second, here at Motley Fool, we recommend buying and holding for the long term. That means even if a housing crash happens, it won’t last forever! So prepare and invest in stable stocks that will rebound after this pandemic and housing crash is over.