” It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of light, it was the season of darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us”
Charles Dickens, A Tale of Two Cities, 1859
While Dickens was referring to the chaos of French Revolution juxtaposed against the tranquility in England, these lines resonate so very well in the current times, as the world around us oscillates between ‘faith’ and ‘adversity’.
While the giant economies have been brought to knees by a microscopic virus, there is still a lot of optimism among the world leaders and economists, who have kept the ‘faith’ in predicting a V, U or L shaped market recovery. For more than a year now, while we have been impatiently waiting for all segments of the market to come back to its sensibilities, some sectors have gained significantly from the side-effects of this deadly pandemic.
In this article, we will see how the shift in consumer behavior, fueled by the uncertainties of 2020, has affected Real Estate sector across three megacities in the world – Mumbai, Toronto and Dubai.
Pre-Covid situation: Same but Different
Just after the dusk of subprime crisis, the real estate ecosystem in Toronto, Mumbai and Dubai witnessed a common trend – there was a significant surge in demand leading to real estate prices cresting all the way from 2009 to 2015. Part of this demand was from non-resident investors but a lot of it was also from new home seekers trying to get benefit of the changes in economic policies. While the bubble of Mumbai and Dubai reached its crescendo in 2015-2016, Toronto has continued its upward trend as middle-class aspiring families continue to migrate here.
While the virus was still a small news segment from faraway China, these three mega-cities had already gone into different paths.
Mumbai had already reached its peak and prices had seen less than 2% CAGR between 2015-18. Rental yields were low and brand-new ghost towns outside the city limits had sprung up. With sharp decline in demand owing to demonetization in 2016, the sector continued to witness stress with the roll out of GST and later with the introduction of Real Estate Regulation Act.
Dubai real estate market was also on a constant downtrend, and rental yield in Dubai had dropped from double digits in 2014 to 5-6% by 2019. However, builders continued to massively invest in new properties as the city hoped for a come-back with EXPO 2020, a huge global exposition set to see a launch in October 2020.
On the other hand, Toronto real market was already in a frenzy since 2018 and it was normal for houses to receive 20 to 30 offers on their listing and to sell for significantly above market value. While in the first quarter of FY’18, houses and condos sold over 20-30% above the listing price; early 2020 witnessed selling price to be in the range of 55% to 65% above the asking rate.
And then the unthinkable happened….
Effects of Covid on the three cities
Let us start with the most unexpected ‘tales’ of all – Greater Toronto Area.
The entire province of Ontario went under lockdown in mid-March, halting its business operations. The results of these restrictions were seen by mid-April when the sales of residential units dipped by 67%; and in May’20 sales were down by 54%. This quickly led to lenders and regulatory bodies to revise their forecast of the industry. CMHC [Canadian Mortgage and Housing Corporation], Canada’s housing regulator predicted that house prices will fall by 9-18% from the pre-Covid level.
In contrast to the predictions, the housing market saw a comeback from April and May levels and by June, the buyers had re-entered the housing market. The market for houses (excepting the condos) rebound to Pre-COVID levels and by August’20; sales were up by 40% over previous year and more than 50% of the units sold off over the asking price.
However, the trend for the condos has not been the same. The demographic shift caused by the pandemic, remote working conditions created the need for larger space thereby leading to lower demands for condos. As per reports by the Toronto Regional Real Estate Board (TRREB) in the second quarter of FY’20, the condominium sales in the Greater Toronto Region, were 51% lower than a year before. Analysts affirm that “the long-term demographic trends and economic recovery in 2021 will likely see condo sales and prices soaring again”.
Work from home and school from home, social distancing requirements have been the key sentiments that have driven the surge in the residential houses’ prices, but the bigger question remains that how these prices will behave once the pandemic is over.
Source: Mortgage Sandbox
However, as expected, this trend is not sustainable in the near term. The recent aggressive and accelerating price growth across Canada has triggered government intervention. In April, the bank regulator proposed to increase the mortgage stress test by roughly 0.5%. The change goes into effect in June 2021. Moody’s Analytics forecasts that Canadian home prices will drop 7% in 2021, with both detached and condos falling. It sees Toronto area prices slipping to early 2017 levels and not fully recovering until mid-2023.
While the Torontonians are back on a borrowing binge, and the demand for mortgages and housing investments continue to surge, some economists predict a demographic turning point in the market.
Now let’s move on to the financial capital of India – Mumbai.
The city was completely unprepared as the pandemic punched another hard-hitting blow to its already battered real estate market. The initial slow response by the government followed by an unplanned lockdown and the continued uncertainty in the job market further pulled the demand down, such that by Q3FY20 the number of quarters required to sell unsold inventories had arisen to 19 quarters from the existing 15 quarters 6 months back.
But things took a turn towards the end of the year. Post Diwali 2020, India went into a false cocoon of immunity and the prices started to stabilize and even grow in some Tier 1 cities. Regulatory actions by state government such as reduction in the circle rates & stamp duty, attractive supplier discounts and freebies, cheaper interest rates and growing need of larger office-cum-home space have been some of the enablers to keep the real estate afloat during such tough times.
This positive trend encountered a roadblock in April’21 as the third wave of Covid hit back with an even more force. The madness is not yet over and while the long term impact of Covid on the city of dreams is yet not clear, most analysts predict that real estate sector in India is expected to grow in coming decade, and real estate, and its 220+ allied industries, are set to contribute to around 13% to the Indian economy, as against 6-7% in the previous decade.
Now, let’s move on to our third city and its unique ‘tale’.
If you have ever been to Dubai, I am sure you know what a Desert Safari is – a thrill ride in the desert as you go up and down the dunes. UAE real estate market has been on a Desert Safari ride since the last many years, and the same has been seen during 2020.
In UAE, prior to the onset of the pandemic, the economy had already started to show early signs of sustained recovery in demand. Infact, the transactions volume increased by 24% in Feb’20 as compared to Feb’19 marking the intital two months as months bearing strongest start to year since FY’17. Later, despite the onset of the pandemic followed by some of the most the stringent lockdowns measures, residential real estate market has remained resilient. Though May’20 marked a slump, the second quarter has shown a quick recovery in the residetial real estate transactions with June’20 itself setting up the M-o-M growth by 60.3%. Transactions have seen improvement mainly in the apartments and villas sale and rents. The growth is also co-related to the fall in the prices and though the villa prices have relatively been stable, the prices fell by 8% in the apartments segment of the market and the average prices dip have been recorded at 7.1% in the 12 months to December 2020.
But while the rise in demand bring optimism, the supply- demand imbalance continues to be a key problem. As per the supply forecast by Asteco, a real estate services company, during FY 2021, 41,500 new supplies are expected in the real estate segment, up from its estimate of around 34,050 in 2020.
However, in the coming October, as Dubai is all set to host the Expo 2020 world fair and in view of the recent series of measures such as long term visa and citizenship rules, the “one-year virtual working program”, and their commendable execution of the vaccination program should boost the market sentiments in the medium- to- long term in the real estate segment. The recent UAE ties with Israel and the recent restoring ties with Qatar is expected to be a catalyst too.
Overall, the Desert Safari is still on…
Closing Thoughts
However varied has been their response, the tales of these three cities have shown one common theme – real estate markets are bound to recover in the long run. While I don’t have a crystal ball, it is obvious that people will continue to buy & rent homes and technology will continue to make it easier to do real estate transactions, for investors and residents alike. So, while the pandemic rages on, the real estate industry can continue to maintain a fine balance between ‘faith’ and ‘adversity’.
This is an abridged version of my upcoming blog on Brazen Banker. Stay tuned for a more detailed analysis, along with links to expanded research material.
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