COVID-19 recession is looming, but there are opportunities

BY JAY BRIJPAUL

Social distancing is needed to curb the pandemic. The global economy is on lockdown and we are heading for a recession. The price of oil has dropped to less than zero. The petroleum industry, instead of making a profit, is paying to remove excess supply because their storage facilities are brimming. Tourism is suffering and with it, many jobs. Unemployment is on the rise and the population financial reserve is dwindling. The number of delinquencies is increasing. Will there be a crash landing?

Pre COVID-19, the housing market saw an upward trajectory. Now it’s nose diving. Real estate has a “trickle-up” effect that begins with the first-time buyer. Many first-time buyers use their RRSP as their down payment but with the stock market, portfolios are shrinking, causing some first-time buyers to postpone buying. Sellers are delaying selling and once the times are back to normal, these homes will become available.  With social distancing, many homes that were once used for short term rentals, such as Air BNB, are becoming available, adding more supply to the resale and rental market.  An increase in inventory is welcoming, relieving the steam from the real estate pressure pot.

Interest rates are at an all-time low and Toronto needs an influx of more homes to quench the thirst for real estate shoppers. The pandemic, however, does not address the real problem in the housing market. It only slows it down. After the SARS outbreak in 2003, there was a surge in home prices. COVID-19 is bigger, and some sectors of the economy will suffer, leading to more job losses and a slightly less demand for housing. This will initially trigger a price drop which will be short lived. Many investors will move their investments from the choppy stock market to solid grounds. We are heading for a soft landing.

Household debts are high and over half a million homeowners have deferred their mortgage payments, buying six months’ time. Once the economy begins to hum, interest rates will climb, and many sellers will be forced to offload. The gradual increase in supply will keep home prices level. The economy will heal and within a year, prices will climb.

Economic downturn creates opportunities. With low interest rates, it is one of the best times to invest. Recession creates a strong demand for rental properties as more homeowners choose to sell and rent.

Ajay, a first-time investor, took a line of credit from his existing home and used it as a down payment for an investment property with a positive cash flow. Natalia, on the other hand, took a line of credit on her property for 3.5% and invested in second mortgages at 12.5%, making a pretty profit. Diego sold his home and moved up to his dream home. The prices on larger homes came down substantially and he benefitted from that.

There will be a surge in condo sales as homeowners realize the importance of social distancing. While condo living is affordable and has amenities such as pools and gyms, many homeowners will prefer a property where they feel safer. With COVID-19, caught in an elevator with a potentially contagious individual is dangerous. Currently condos are hot cakes and it is a good time to step out and step up.

First time buyers should consider being qualified for a mortgage and ensure that their down payment is readily available. For those who are prepared, the window of opportunity will open. First time buyers who are currently renting should also ensure with their landlords that they are not locked into a lease. If they are, they have an option to sublet to another tenant. Usually, landlords will cooperate.

Homeowners with many debts should consider consolidating. Mavis is juggling between paying her credit cards along with a car loan and a mortgage. Late payments will damage her credit and can send her into a financial tailspin. She might be forced to sell her home. Mavis approached her lender who advised her to add the debts to the mortgage and increase the number of years remaining to pay off the mortgage. She managed to keep her nose above water without losing her home or filing for consumer proposal or bankruptcy.

During the pandemic, stay safe. All the money in the world cannot revive the dead. With life, there will be opportunities. Sometimes, it is better to take a step backwards and stand on solid ground than to take a step forward and land in a ditch. Wrapped up in every problem, there are seeds of opportunity. Let’s unwrap them together.