The gap between downtown real estate and suburban homes has narrowed significantly during the COVID-19 pandemic, a development that could make non-major city markets even more vulnerable to a slowdown.
That’s one of the key takeaways from a recent Bank of Canada analysis that examined property valuations in 15 cities across the country, both before the pandemic and now.
- Do you have a question or something to say? Email: email@example.com or join live in the comments now.
Historically, real estate in inner city cores has tended to be more expensive because people want to be close to city services and amenities and livelier job markets. “But that pattern may have shifted during the COVID-19 pandemic,” Louis Morel, a policy adviser at the central bank, said in an analytical note released Monday.
The expense and inconvenience of commuting is usually a downside of living in the suburbs, but the mass movement to work from home during the pandemic turned that old adage on its head as inner-city residents flocked to the suburbs en masse for more space to have.
Morel notes that many of the services that downtown residents enjoy while living in cities, like concerts, restaurants, and live entertainment, have been closed in one form 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 housing may have encouraged many Canadians to look to suburban real estate, where lots and homes are typically larger and more affordable.”
Home prices have risen almost everywhere during the pandemic, but gains have been particularly strong in the suburbs, making them less affordable today than ever.
In 2016, a home in a suburb 50 kilometers outside of downtown would typically be worth about 33 percent less than a similar home in the city. Even in 2019, before the pandemic, that gap had narrowed to 26 percent, but according to the bank’s calculations, the average cost benefit had shrunk to just 10 percent over the past year.
Randall Bartlett, an economist at Desjardins, succinctly described the phenomenon that fueled suburban housing prices: “Drive until you qualify.”
“The increase in 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 to have more space once children appeared, they could now move much further afield, including to rural communities and provinces with better affordability.”
But that trend may already be starting to change, as many workplaces that previously worked from home have reverted to a hybrid work model where most employees will return to the office, at least part of the time.
The trend is already evident in the housing market, as suburban markets, which posted outsized gains during the pandemic, are now seeing price declines, even as metropolitan centers are mostly holding steady.
“It’s hard to imagine the housing markets of some smaller communities maintaining their unprecedented pandemic price gains as people return to in-person work more regularly,” Bartlett said.
He says areas outside of Toronto, where some average prices have doubled during the pandemic, are most vulnerable to a slowdown.
“As we look ahead to how the correction in the national housing market will play out at the provincial level, it is expected to be somewhat the opposite of what we have seen during the pandemic.”
While the Bank of Canada isn’t speculating or forecasting the cause, it warns that the narrowing price differential between suburbs and inner cities could become a problem if preferences shift earlier again.
“If this preference shift is only temporary, the proximity premium could partially return to its pre-pandemic levels,” the bank said.
“Such a shift in relative prices could be particularly problematic if housing supply in suburban areas reacted strongly to expectations of further rising local demand.”