How Corona Virus will impact the Real Estate Market ?



According to Worldometers data, currently, there are 179,575 cases in the world with 7,068 deaths and 78,286 recoveries from Corona Virus COVID-19. This all started in Wuhan, China wet market where dead and living animals and birds are sold.  

This market in China is a densely packed market and poses a very high risk of spreading the viruses also because in these types of markets it gets very difficult to maintain good hygiene standards. Due to that, there is a very high risk of passing the viruses from animals to humans. 

It is believed that a similar spread happened in the case of Corona Virus where it is believed to be originated from the Bats in this Wuhan wet market. However, it is not confirmed. Nonetheless, it doesn't matter where it came from but now the whole world has been affected by this Corona Virus spread. 

We have seen the effect here in USA and Canada as well in the form of lineups at the stores, fights over the toilet paper, empty shelves in the stores for sanitizers and hand soaps. There are around 4141 active Corona Virus cases in the US and 375 in Canada. 

Has the Corona Virus affected the Economy? The answer is Yes. How deeply the COVID-19 will affect the Financial stability and Real Estate markets? The answer is unknown. But, there is some proof already that the virus will affect the global economy and the USA, Canada will not be left out. 

Here we will discuss, 5 major facts that are directly or indirectly related to the Corona Virus pandemic. We will see how the Real Estate Market in USA and Canada will observe the effect of it in the coming weeks or months.

1. Low-Interest Rate
2. Supply Chain Affect
3. Lower Gas Prices
4. No Foreign Buyers
5. No Change in Stress Test Rate

Let us look at all of these factors in detail one by one.

Low-Interest Rate

On March 4, 2020, Bank of Canada announced its first cut in Interest Rate by 50 points which brought the benchmark rate to 1.25 percent. After just 10 days, Bank of Canada announced another cut of 50 more points in response to Corona Virus COVID-19. This new rate reduction is part of the package of measures announced by the federal government to fight the effect of Corona Virus on the Canadian economy. 

This reduction in Overnight Rate by the Bank of Canada will prompt the large banks to reduce their Prime Rates by the same percentage.

Assuming that the Prime rate after March 4 cut came down to 3.45%, this new rate cut will further reduce the Prime Rate by 50 points i.e 2.95%. Banks have already started to slash their 5 year fixed mortgage rates which is good for people having 5 year fixed rate mortgages who are refinancing their mortgage now. They will get a great deal on the rates for 5 fixed years based on this new rate. 

However, for people who had opted for a variable rate mortgage in the first place, they will start seeing their monthly payments going down in the coming weeks. For example, If someone is having their variable mortgage rate as (Prime - 1)%, their new Rate of interest would be (2.95-1)%, which is equal to 1.95%. Which is great as compared to the rates in the past. 

Due to these low-interest rates, buyers will be prompted to get into the market looking to buy the properties. Looking at the Canadian market, where there is already a shortage of housing, this will bring more buyers in the market and the market tends to become a Seller's market. Result of which could be higher house prices. However, Its not just the Bank Rate cuts but some other factors to consider for this assumption which we will discuss below. 

Supply Chain Affect

Corona Virus started in Wuhan city of China. The whole world knows that China is the biggest manufacturer and supplier of goods and services. Due to the Corona Virus spread and lockdown in China, there is a shortage of workforce, goods and raw materials all over the world. Huge plants in China sit idle, Workers are working at 50% capacity. Due to this, the manufacturers and retailers directly dependent upon China for raw materials and goods are seeing the direct impact on the business. 

For any business to thrive, they must have a well-functioning supply chain that can handle these types of ups and downs in the demand and supply of goods. Though China is now out of the pandemic effect of COVID-19 still the Government is trying to contain the virus and no new travellers or tourists are allowed in the country. 

If this continues for a longer period than expected the businesses may shut down for non-availability of the raw materials or finished goods. We may see layoffs, plants shutting down and businesses going bankrupt. All of this will affect the global and Canadian economy which is already headed towards a recession. This adverse effect on Supply chain may result in house prices going down because the buyers are willing to buy because of low-interest rates but they don't have job and income to pay for the mortgage. 

Similar to my first point, this alone won't be affecting the overall housing market but the combined effect of all these factors fast-forwarded into the future will give us a clear picture.


Lower Gas Prices

What drives the housing market? The Buyer. 
What makes the buyer feel good and secure about his financial status? His pocket. 

According to analysts at Deutsche Bank, a 23 percent decline in gas prices adds $100 to monthly income for the average American. If the buyer feels good about his financial stability that adds to his purchasing power. This means that lower gas prices will increase the purchasing power of the buyer. Lower gas prices in addition to bank rate cuts due to Corona Virus spread will also add fuel to the housing market. 

At this time when the whole world is fighting with the novel Corona Virus, Saudi Arabia kicked off an oil price war with Russia. China, the biggest importer of oil in the world was turning back the tankers as the whole country was fighting with Corona Virus. 

This was the biggest fall in oil prices since the Gulf War and there is more to come as Russia and Saudi Arabia flood the market with oil. The property rates are expected to go up due to this oil price war. However, no one knows how long until this will last and what would be the final outcome of this for the housing market. We need to stay tuned to find that. 


No Foreign Buyers

Due to the Corona Virus impact, people are cancelling their vacation plans, flights are getting cancelled, borders are closed. People are heading back home as soon as possible from their work or vacation trips. All this chaos has resulted in a lower number of foreign buyers travelling to the US and Canada for investing in the Real Estate. 

In the past, Vancouver and Toronto Real estate markets had seen a huge impact of foreign buyers from China buying real estate due to which a foreign investor tax was also imposed to control the markets. 

Now, there are no foreign buyers travelling to the US and China for investments. This will surely have an impact on the property prices. As there will be no demand from foreign buyers the real estate may see a downfall. 

To know how much the markets will be affected depends upon the timeframe for how long the Corona Virus impact will stretch. Governments are taking necessary measures but nobody is sure yet when this will be in full control?

No Change in Stress Test Rate

The Bank of Canada announced in Jan 2020 that the formula for Stress test will be changed which will bring the Stress Test rate from 5.19% to 4.89%. But, considering the uncertainty in the financial stability and Corona Virus affect, the bank has put a hold on this change. Also, the bank has already lowered the Overnight benchmark Rate twice in the month of March 2020. 

After much lowered rates its highly unlikely that there is a change required in the stress test rate by the bank. However, nothing can be predicted for now since the whole world is struggling with the novel Corona Virus COID-19. 

Looking at the above points in detail, the conclusion is that the economy is at the verge of breaking and many have already predicted a recession coming in 2020. All we have to see if the markets will come back stronger than before or will break after dealing with this emergency situation?

Analysts are keeping a close eye on the financial, real estate and Stock markets to better predict the after-effects of the Corona Virus. 

Stay home, wash hands frequently and be considerate about the seniors during this tough times. 
Stay safe!
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