Home Prices Increase Despite COVID-19 Lockdowns

Many would assume that the current situation in the world regarding COVID-19 would cause a major drop in home prices as economies around the world struggle to cope with the abrupt change that this virus has brought upon us.  There is no question that we are certainly in an economic recession, but we must remember that housing is not always affected directly by the health of the economy. The most recent recession in 2008 certainly had an impact on the housing market, but the cause of the recession was housing related in itself.

The reason that real estate has the word “real” in it is because it is a “real” asset that you are purchasing. Unlike stocks and bonds, you can touch and feel land and houses. Stocks and bonds are simply paper that represents ownership in a business or company which is not a physical asset. In no way am I saying real estate is a superior investment to stocks and bonds, but we do have to take a moment to recognize that they are vastly different.

Housing is an essential need in society, even when times are tough. While stocks are essential to our economy, their affect on an individual’s day to day life is minimal compared to the affect that housing has. Throughout history it can be seen that economic downturns have caused investors to take their money out of these made up pieces of paper called stocks and put their money into REAL estate; No matter what the economy is doing, land will remain land.

In simple terms the real estate market is very much driven by the rules of supply and demand. When demand is higher than the inventory of supply, prices go up. When the inventory of supply is higher than the demand of buyers, prices will come down. If the ratio of buyers to sellers remains equal, prices should remain stable.

With all of this in mind, we can look at the current COVID-19 situation and come up with some conclusions as to why house prices have not come down.

The total number of sales for April 2020 was extremely low with only 656 sales, 59% fewer sales than the 10-year average for the month of April. At this point it might seem as if demand for housing is down therefore prices should come down as well. The problem with that conclusion is that we are not looking at enough information to really tell us what is going on. We must also consider the current inventory to figure out the ratio of buyers to sellers. We can look at the current inventory of active listings for this which is 28% fewer homes than a typical April would have.

Now you are probably thinking that 59% fewer sales but only 29% less inventory means that prices should come down… In simple terms that would be correct, but we have to keep in mind that the last 4 years have seen prices increase drastically which tells us that the last four years had a low inventory problem which therefore has skewed the 10 year average for the number of active listings.

The last way we will look at the effects of supply and demand is by looking at the sales/active listing ratios. Using this information we know that that a buyers market (prices decreasing) will have a ratio of 12% or lower, a sellers market (prices increasing)  will have a ratio of 20% or higher and a balanced market (minimal price fluctuation) will be anything that falls between 12-20%. April 2020 finished at a sales to active ratio of 13.1% telling us that we finished the month in a balanced market.

April 2020 finished an HPI benchmark price of $851,100 for the average home of all property types in the Fraser Valley. This is up 1.9% from one year ago and up 0.4% compared to March 2020. The longer the lockdown goes on the more likely we will see prices slide down slightly, but once this is all over we may actually see prices take a jump up as the pent up demand of buyers that have chosen not to buy during these times.

In short, it would appear that a very similar number of would be buyers and would be sellers have chosen not to enter into the market during this lockdown which has kept the ratio of supply and demand to a number that reflects price stability.

There are many other factors that come into play in determining the price of housing, but it remains that supply and demand is a core fundamental aspect of the price of a home.

So, all of this leads to the question as to whether it is a good time to buy or sell. Unfortunately, the answer is not a one size fits all answer and we would have to look at your unique situation, but from an economic standpoint we can conclude that it is likely not a bad idea to make a sale or purchase during these times. The other question to ask yourself is how you feel about having prospective buyers come through your home, or how comfortable you are going through other people’s homes. As industry we are taking sanitation and the safety of all clients and agents very seriously. I am providing masks and gloves for my clients during showings, and I always make sure that agents bringing their clients through your home do the same.