The gap between downtown and suburban real estate has narrowed dramatically during the COVID-19 pandemic, a development that could make markets outside of major cities more vulnerable to a slowdown.
That’s one of the key points from a recent analysis by the Bank of Canada that looked at housing assessments in 15 cities across the country, before the pandemic and now.
Historically, real estate in the heart of downtown tends to be more expensive because people want to live close to city services, amenities, and the most vibrant job markets. “But that pattern may have changed during the COVID-19 pandemic,” Luis Morell, a policy adviser at the central bank, said in an analytical note released on Monday.
The cost and inconvenience of commuting is usually a downside to suburban life, but the mass movement toward working from home during the pandemic has turned that adage on its head, as downtown residents have flocked en masse to the suburbs for more space.
Morell points out that many of the services downtown residents enjoy about city life, such as concerts, restaurants, and live entertainment, have been closed in one form or another.
“Between working or studying from home and general health restrictions, people are spending more time at home than ever before,” he said. “The desire for more living space may have encouraged many Canadians to seek real estate in the suburbs, where many homes are usually larger and more affordable.”
Home prices have skyrocketed almost everywhere during the pandemic, but the gains have been especially large in the suburbs, making them less expensive today than they ever were.
In 2016, a suburban home 50 kilometers outside the city center would be worth about 33 percent less than a similar home in the city. Even in 2019, before the pandemic, that gap narrowed to 26 percent, but according to the bank’s calculations, the average cost benefit shrank to just 10 percent last year.
Randall Bartlett, an economist at Desjardins, described the phenomenon that’s causing suburban home prices to rise succinctly: “Drive until you qualify.”
“The increase in remote work during the pandemic has encouraged migration within and across counties in a way unprecedented in history,” Bartlett said in a separate report last week. “Where families once left city centers in search of more space once the children came, they can now move further afield, including to rural communities and counties with better affordability.”
But that trend may already be beginning to change, as many workplaces that previously embraced working from home are returning to a blended work model that will see most employees return to the office at least part-time.
The trend is already showing in the housing market, where suburban markets that have seen big gains during the pandemic are now seeing a drop in prices, even as most major city centers have stabilized.
“It is hard to envision housing markets for some small communities maintaining their unprecedented gains in pandemic prices as people return to personal work on a more regular basis,” Bartlett said.
He says areas outside of Toronto, some of which have seen average prices double during the pandemic, are most vulnerable to the slowdown.
“As we look at how a correction in the national housing market occurs at the county level, it is expected in some ways to be the inverse of what we’ve seen during the pandemic.”
While the Bank of Canada stops short of speculating on the cause or making any predictions, it warns that narrowing the price gap between suburbs and downtown could become a problem if preferences return to the way things were.
“If this shift in preference is temporary, the proximity premium may partly return towards the pre-pandemic level,” the bank said.
“Such a shift in relative prices could be particularly problematic if the supply of housing in suburban areas is more responsive in anticipation of continuing domestic demand to increase.”