Suburban real estate vulnerable if demand changes after pandemic, Bank of Canada warns

The gap between downtown real estate and suburban homes narrowed significantly during the COVID-19 pandemic, a development that may make markets outside of big cities even more vulnerable to a slowdown.

That is one of the main conclusions of a recently published report bank of canada analysis that looked at home valuations in 15 cities across the country, both before the pandemic and now.

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Historically, downtown real estate tended to be more expensive because people wanted to live close to city services and amenities and more dynamic job markets. “But this pattern may have changed during the COVID-19 pandemic,” said Louis Morel, a policy adviser to the central bank, in an analytical note published on Monday.

The cost and inconvenience of commuting are often a downside to suburban living, but the massive move toward working from home during the pandemic has turned that old adage on its head, as inner-city residents flocked to the suburbs for more space.

Morel points out that many of the services downtown residents enjoy about living in cities, such as concerts, restaurants and live entertainment, have been shut down one way or another.

“Between working or studying from home and public health restrictions, people were spending more time at home than ever before,” he said. “The desire for more living space may have encouraged many Canadians to look for property in the suburbs, where lots and houses are often larger and more affordable.”

Home prices soared almost everywhere during the pandemic, but the gains were especially big in the suburbs, making them less affordable today than ever.

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In 2016, a house in the suburbs 50 kilometers from the city center would typically be worth 33% less than a similar house in the city. Even in 2019, before the pandemic, that gap had shrunk to 26%, but according to the bank’s calculations, the average cost benefit had shrunk to just 10% last year.

Randall Bartlett, an economist at Desjardins, succinctly described the phenomenon that caused the boom in suburban home prices: “Drive until you qualify.”

“The rise of remote work during the pandemic has encouraged migration within and between provinces in a way unprecedented in history,” Bartlett said in a separate report last week. “Where families once left city centers for more space once the kids arrived, they could now move much further afield, including to better-priced rural communities and provinces.”


But that trend may already be starting to change, as many workplaces that had previously embraced work from home have reverted to a hybrid work model that will see most staff return to the office at least part of the time. .

The trend is already showing up in the housing market, as suburban markets that saw outsized gains during the pandemic are now seeing price declines, even as major city centers remain mostly flat.

“It’s hard to imagine housing markets in some smaller communities sustaining their unprecedented pandemic price increases as people return to in-person work on a more regular basis,” Bartlett said.

He says areas outside of Toronto, some of which saw average prices double during the pandemic, are the most vulnerable to a slowdown.

“As we look ahead to how the national housing market correction will play out at the provincial level, it is somewhat expected to be the opposite of what we saw during the pandemic.”

While the Bank of Canada stops short of speculating on the cause or making any predictions, it does warn that narrowing the price gap between suburbs and city centers could become an issue if preferences go back to the way they used to be. be things.

“If this change in preference is temporary, the proximity premium could return in part to its pre-pandemic level,” the bank said.

“Such a shift in relative prices could be especially problematic if housing supply in more suburban areas were to respond strongly in anticipation of local demand continuing to rise.”

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