Is the housing and rental market about to crash? Well, this seems to be a major question being raised over the past number of weeks. I am not one for watching the mainstream news, but it is hard not to see or hear stories about the current housing situation. I even get drawn in by some of the catchy headlines
Here are some of those headlines (USA and Canada):
Washington Post – The housing market faces its next crisis as May rent and mortgages come due.
CNBC – Next year will be hard on the housing market.
CBC News reported on – CMHC (Canadian Mortgage Insurance – similar to Fannie Mae in the USA) – CMHC tightens mortgage insurance rules starting July 1,
MacLean’s – Thousands of Canadians can’t pay their rent today
CBS News – 20% of U.S. renters didn’t pay the rent on time this month
Market Watch – Over 4 million Americans are now skipping their mortgage payments.
Financial Post – Canadian banks pause payments on 10% of mortgages as they field 500000 requests for deferrals
Even some of my favorite real estate YouTubers are in on it. I want to share my thoughts, please keep in mind this is just my opinion, and not to be taken as fact, or advice, just entertainment.
In my area (the province of Nova Scotia, Canada) the economy did not fall off the rails until March 22, 2020. That is when a state of emergency was called by the government. It forced many business to fully or partially shut down. It was also at a time when many international travelers were returning. The social distancing rules and self quarantine rules were new and not followed by everyone that returned from an international trip, so cases started to rise.
We were suddenly faced with the unknown. I happen to live in a university town in an area that is dependent on students from other countries or parts of Canada. When the universities shut down and students wanted to get home, it was a mass exodus. This caused a glut of student rentals to be forced onto the rental market, so an area that was spoiled by a 1% vacancy rate now had lots of vacancy. At the same time companies all across the country were faced with the difficult choice to lay off as many staff as possible, to make sure there was a company left to come back to.
I am sure if we as a society could go back in time, we could have prepared better, but it was hard to imagine in a country like ours that we take the freedom of movement for granted. I mean the only time we are ever willing to line up to get in a store would be for a Black Friday special.
Then the predictions started to happen. I even started to make my own, and guess what? they were all wrong so far. As a landlord I was sweating on April 1st, along with many of my landlord associates. I also had several conversations with various landlords about asking their banks for a mortgage deferral. Questions like – Will it hurt my ability to borrow in the future? Will it damage my credit rating? The feedback I was getting from those who contacted banks, was that some knew about the 6 month payment deferral plan the government mentioned, and others did not.
The government in Canada and in the USA acted very quick to get stimulus cash into the economy. This may have a negative impact on the value of the dollar in the future (there is a whole other set of headlines about the economic impact of the virus and stimulus) We will stick to real estate.
This put cash in the hands of many laid off workers, which allowed them to pay there bills. When you look at a headline that reads about a certain percentage of tenants not paying rent on the first of the month, you need to compare that to how much rent was collected by the 5th, or even the 15th. Then you need to compare those numbers to regular times. Let’s face it, if you manage multi-family you likely have had cases of awesome tenants that pay a few days after the first at some point.
We are now into June. The stimulus money seems to still be flowing, mortgages and car payments are being deferred, and the economy is opening back up in several phases all over Canada, the USA and many parts of the world.
Here are my predictions at this point (they may be proven wrong, and do not make any financial decisions based on them. Seek the help of a professional, not an entertainment blog like landlordbydesign.com):
On the real estate market: Real estate sales and the strength of a market are based on supply and demand. You cannot paint an entire country with one brush. That being said you can look for opportunities in areas that maybe hit hard due to the virus. Look for locations based on industries that will likely bounce back once international travel is permitted, Universities, Cruise ships, and tourism will all bounce back.
Areas that may be good to look at for deals would be Orlando, LasVegas, Hollywood, Toronto Canada. The prices will still likely be high, however, you will likely find that some over leveraged investors may have bought rental properties in these areas and are carrying one or more mortgages, and may want to sell.
Toronto Canada is unique due to a huge condo boom over the last number of years, many people bought these condos to rent as furnished rentals on websites like AirBNB. Now many of these furnished condos are sitting vacant, so owners are converting them to long term rentals and reducing the rent, just to get them occupied. In many cases the rents are not covering the expense, some landlords will need to sell quick.
Those of us that are in the residential landlord business know how tough it is. When you ad the stress of the possibility of tenants not paying rent, and then not being able to find qualified tenants. Many independent landlords have 3 properties or less, so some might just want to get out and call it a day. The challenge is finding a tired worn out landlord might take some digging. Maybe place an ad on Kijiji or Craigs list.
Affordable housing opportunities – This is brought up a lot in many areas. In Canada the government is determined to off set all the newer apartments that have been built over the past number of years with affordable rental units. I am not sure how much truth there is to what I am about to say, but it has been rumored that the Canadian government might seek distressed / run down apartment buildings to buy and renovate. This will help them meet their aggressive affordable housing unit count objectives. If you own a building that you do not feel the capital investment to bring it into the current century is worth it, you could reach out to your local politician and see if they would be interested in buying it. If you do not want to sell, also check into government programs to renovate, or add affordable rental units to an existing property.
Government program to fill vacant student rentals. In our area since many students will not be attending local universities in the fall, the government is looking at it as an opportunity to solve their housing shortage problem. They are seeking landlords who will rent to tenants they place, where they will pay the rent. Many other areas are working on similar programs. The IIE reported there were 1,095,299 international students in the USA in 2019. In Canada the CIC reported there were 642000 international students in Canada in 2019. Although not all of them would have left or plan to leave, it is hard to ignore the fact that student housing vacancy could be a problem this coming fall.
Can I buy a cheap house? Will people pay their mortgages?
Some people will not pay their mortgages, or not have the ability to do so. Many who have lost there jobs will be back at work before the 6 month deferral term runs out, so that should provide time to catch up financially before they have to start paying.
The pricing of houses will depend on the demand and supply of inventory on the market. This along with the ability for buyers to borrow money. As big banks and lending institutions tighten up, it provides opportunities for small financial firms and landlords who do rent-to-own. Lenders always try to find ways to lend money. Watch out for headlines that focus on percentages. It is often used for impact, but you need to dig a little more. An example could be if you see a headline that reads 20% drop in housing prices. That could translate into a 1 million dollar home selling for $800000 (which would still be out of reach for many), or if the previous year some really expensive homes sold, then a bunch of cheaper houses sold a year later, it may appear worse than it is. Even in any given city, there is usually a mix of cheaper and more expensive homes.
Summary: I will say that as fast as the economy went to heck back in March, it appears to be bouncing back just as fast. Many people will face financial hardships, many businesses will close if the government does not help with the expenses of businesses that were forced to shut down, that being said people and businesses are resilient and resourceful. Will we have a second wave? I really do not know. Is the market rally and apparent boom in car sales and new home construction in many areas just a bubble based on pent up demand? Are people trying to get into the home ownership market before lending rules tighten up? Is the millennial generation starting to buy homes and cars?
The lower income work force and a lot of the middle class seem hardest hit. Leading into the pandemic the unemployment rate for many areas was at an all time low. Will most or all of the laid off staff get hired back? What will happen when the payment deferrals and stimulus cheques stop? In my opinion the situation and decisions made by various groups of government changes almost daily. I will say I will be very happy when a vaccine is made. It is definitely a challenging time financially and emotionally as we work through these uncertain times. The best advice I can give is to stay positive, stay chill (go with the flow, because it will change). If you do not have a job, and were laid off from a job in an industry that will be slow to bounce back, it could be a good time to change industries. Randstad provides a list of industries that are growing right now.
Stay positive, safe and healthy,
Until next time,
Design your landlord experience,
Michael P Currie
Landlord by Design
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