Landlords among most vulnerable homeowners during COVID-19 pandemic

Data on Canada’s housing market have yet to reveal the full impact of the novel coronavirus pandemic.

But market watchers say one group of homeowners looks especially vulnerable: over-leveraged residential landlords.

“You have investors who were sitting on a portfolio of maybe five to 10 rental properties, and had been renting them all out on the short-term rental market,” said Stephen Brown of Capital Economics.

In the pre-coronavirus economy, “Airbnb’s seemed like the best game in town,” said David Larock, a Toronto mortgage broker and owner of Integrated Mortgage Planners.

Often, real estate investors would make much more money renting a home for weeks or days at a time than they would have with a traditional lease, he added.

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But with the country on lockdown and the border with the U.S. shuttered, the short-term rental business dried up overnight, both Brown and Larock noted.

What happens next could have implications for both the rental and the property market.

Some investors are likely scrambling to find long-term tenants for their short-term rentals, said RBC economist Robert Hogue. This could add some much-needed supply to tight rental markets, he added. Vancouver, Toronto, Montreal and Ottawa all had vacancy rates of less than two per cent in 2019, according to data from the Canada Mortgage and Housing Corporation.

But some struggling landlords may just have to sell their investment properties.

“Some of those people have tenants who simply can’t pay anymore, and maybe … their own incomes have been impacted,” Larock said.

Mortgage payment deferral options aren’t always available for investment properties, while Ottawa’s planned rent relief program only applies to commercial landlords.

Cash-strapped residential landlords, then, could be among the first homeowners forced to offload real estate they can no longer afford, something that could put downward pressure on prices, Larock said.

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Another set of homeowners in a tight spot are those who bought a new home before the lockdown and have yet to sell the old one, Brown said.

“That’s a small proportion of people who are basically stuck now with two homes,” he said.

Those two groups of homeowners are the main reason Brown forecasts a five-per-cent decrease in housing prices nationwide over the next three months.

In some of the larger cities, like Toronto and Vancouver, the price drop will likely be more severe — up to 10 per cent, Brown said.

While short-term rental listings don’t exceed 0.8 per cent of total private housing units in any of Canada’s urban clusters, they often make up a significantly larger share of the housing supply in certain urban neighbourhood, a McGill University study found.

For example, “in some census tracts in downtown Montreal. one in 10 housing units are frequently rented on Airbnb,” the report said.

Several homes selling at lower prices in the same neighbourhood, in turn, could have ripple effects for buyers, too, according to Larock.

While Larock isn’t seeing this happening yet in Toronto, “if property prices start to fall … the risk that a property won’t appraise for what a borrower has offered to pay will rise,” he wrote in a recent blog post. This could force homebuyers to make up the difference, he added.

For example, suppose a buyer signed up to buy a home for $500,000 with a five per cent down payment of $25,000, Larock said. If the bank’s appraisal later valued the property at $475,000, the buyer might be on the hook for the $25,000 price difference in addition to a 5 per cent down payment of $23,750 (5 per cent of $475,000).

In another scenario, buyers with enough cash set aside for a 20 per cent down payment may now find themselves having to use some of the money to bridge the price gap, which could force them to put down less than 20 per cent and be forced to sign up for a 25-year instead of a 30-year amortization period, Larock noted.

A longer amortization period results in lower mortgage payments. However, if they choose amortizations over 25 years, Canadians must have a down payment of 20 per cent or more.

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Still, homebuyers can protect themselves against the risk of low appraisals by making their offer conditional on financing, a practice that’s becoming increasingly common amid the pandemic, Larock said.

At RBC, Hogues believes the odds of a major housing price drop remain low.

March figures showed sales falling more than 14 per cent nationwide compared to February, and numbers are likely to be much uglier in April, the first full month of lockdown. Data from the first week of the month showed sales down 50 per cent across Canada, Hogue noted in a recent report.

But the number of homes newly up for sale has also fallen off a cliff, and with both sellers and buyers largely on the sidelines, property values are “generally holding up,” Hogue noted.

What happens next in terms of housing prices will depend on whether supply and demand continue to move in tandem, Hogue said.

The speed of the housing market recovery, he said, will depend in large part on how quick the labour market heals. The longer unemployment remains elevated, the slower the real estate market revival, he added.

Much will also depend on immigration from abroad, which has been an important driver of housing demand in recent years, both Hogue and Brown said.

Hogue’s baseline forecast has price growth tapering off in Toronto, Vancouver, Ottawa and Montreal.

The outlook, though, “isn’t as rosy,” in the Prairies, where prices were already in slow decline and unemployment higher even before the health emergency, according to Hogue. It doesn’t help that the region is coping with the double-whammy of an economy under lockdown and a collapse in oil prices, he added.

Still, Brown sees a small silver lining in that.

Because those housing markets didn’t have much price momentum coming into the crisis, he said, there may also be less scope for property values to fall.