One of the world’s largest risk advisory firms says Canadian real estate won’t be spared. Moody’s Analytics released their Canadian Q2 forecast, showing how COVID-19 will impact the Canadian economy. The firm advised their institutional clients that real estate will be impacted, with even an optimistic scenario showing price declines.
Risk Assumptions and Baselines
First, a quick note for non-analysts on the basics of assumptions and baselines. Analysts take a snapshot of environmental variables, and then create a baseline forecast. The baseline is a reasonable assumption of what would happen, if everything went as expected from today. From there, they have various impact scenarios that are based on any increase of risk.
The baseline used in the most recent GDP forecast assumes a quick reboot. Economic activity would return in early June, and the longer the lockdown lasts – the worse it gets. For instance, scenario 3 (S3) is if the economy fully reopens in July – just one month later than the baseline. In that time, the baseline annualized change to GDP goes from -15%, to -25% with the later reopening. So we should reopen the economy next week, right? Nope.
Both the government and the senior economist have warned re-opening too early is a bad idea. If re-opened too early, the virus’ second wave could be worse than the first – like Singapore is currently seeing. Re-opening too early would roll the whole containment back. That would prolong the lockdown, and create even greater economic risks.
Low Interest Rates Won’t Provide A Boost
Optimism around low interest rates is non-existent in this environment. Moody’s notes “reduced interest rates will not save the [Canadian] housing market.” Low rates are great for freeing up cashflow, and providing stimulus. Those are generally points that help more in recovery though. Interest rate cuts are generally bad signs, as people like the Globe’s Rob Carrick have been pointing out for weeks now.
The focus should be on the level of unemployment after government incentives expire. The firm notes employment is the single biggest factor for home prices. They also state there is some noise with initial unemployment claims. The unemployment rate should decline as the economy reopens. Temporary layoffs would return, helping to soften the impact. However, we won’t know what the natural, and efficient labour market looks like until year end.
Canadian Home Prices Expected To Drop Up To 30%
Canadian real estate prices are expected to drop in the baseline, and the declines get bigger as the lockdown persists. The S0 baseline shows prices decline 8% in real terms, with a return to breakeven one year later. In the S3 scenario, prices decline 20% in real terms, and recover in late 2024 or 2025. In the S4 forecast, prices fall over 30% well into 2022, and recover in real terms towards the end of the decade. Reconstructing their model with the same macros parliament is using, prices drop about 24%.
Canadian Home Price Declines Forecasted
The forecasted decline to home prices across Canada. Baseline scenarios S0 and S1 are similar, and unavoidable according to the forecast. Parliament reconstruction is created by reconstructing Moody’s model, and using the macro guidance forecast parliament has been given.
Source: Moody’s Analytics, Better Dwelling.
The government is most likely to try to extend market inefficiencies to prop up house prices. However, that would have a limited impact, and lead to a whole other set of problems. Instead, unemployment is the area people should be watching. Programs targeting the creation of real and sustainable employment will have the biggest impact.
Also worth a note is these scenarios deal with an unknown behavioral response. The assumption is once the real economy reopens, things return back to normal. However, as places like Wuhan have discovered, the psychological impact may be deeper and longer than people think. Despite the reopening of their economy, people are still avoiding things like eating out and shopping. People not spending in the economy leads to a much longer recovery period.
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That’s a shame. Without COVID-19, Canadian real estate prices would have increased 15% per year until the end of time. Canadian wouldn’t even have to work, they could have just borrowed off the equity.
Love it!
Just put it on the HELOC “YOLO”.. No big DEAL… I’m so happy I have my head out of the SAND!
Where’s “S2,” because that seems most likely, no?
There was no S2 scenario for housing. If you work in finance, your workplace most likely has access to the forecast. House prices were the least notable downside scenario.
Moody’s only advises rich people though. My bank/mortgage lender told me it’s only going to rise 1%, so I’m going to believe them.
This is correct. People selling me stuff have no motivation to assume their job is more secure.
Surprised you didn’t mention the equities forecast in the same report, and the resulting reverse wealth effect.
People that own a significant amount of stocks are likely already homeowners, and will turn their equities returns into upgrades. You don’t just lose 20-40% of your equity investments, and then spend a ton of money on a new house. Ladder is broken.
This is also going to delay the number of people retiring, placing downward pressure on wage growth.
Dr Tam warned of second or third waves coming. It’s nice to have government acknowledge risk for once, but people are ignoring a heck of a warning.
https://www.thestar.com/politics/federal/2020/04/28/ottawa-and-provinces-agree-to-guidelines-that-must-be-met-before-covid-19-restrictions-are-lifted-here-is-what-we-have-to-do.html
Oh? Is that the same Dr. Tam who expressly said that Canada was “low risk” to get an outbreak? The same one who said that “putting a mask on an asymptomatic person is not beneficial”? The same one who said we were “well prepared for a serious outbreak” despite her own organization having literally destroyed millions of N95 medical grade facemasks in 2019?
She’s a f*cking quack.
These agencies and governments and economists and bankers only look at the domestic numbers. They fail to realize that the financial systems and economies of the entire world is one big interconnected system thereby making it very fragile.
They are only looking at this from only the Canadian domestic perspective. Never in human history has the entire worlds economies have been shutdown in lockstep. The entire worlds supply chain for goods and food supplies has been disrupted and as a result of this shock there will be massive impacts to the worlds populations, no one is immune or spared.
Commerce is not like Electricity, flick a switch and it turns up. It will take years maybe even a decade to get anywhere close to before the lockdowns.
Secondly, during times of uncertainty if people are not confident of the future, they are not going to out and spend!
You have to look at Japan and Europe, they have had negative interest rates for decades (Japan) and since 2014 in Europe and their respective economies have zero growth.
So this antiquated Keynesian central bank policies of reducing interest rates to stimulate has totally failed in Japan and Europe and we see the FRED, BoC, BoE, BoJ continue to use this playbook.
It will not work! There is just too much debt in the world and Canada is a leader amongst the G7 nation.
Finally, some objective reports starting to make the news; unlike CBC, for instance, who asks realtors what they think will happen to prices.
I think this is a realistic analysis. I saw a report yesterday from TD economist Rishi Sondhi, predicting 7.8% increase in house prices in 2020. It sounded ridiculous to me not because I am expecting a fall in real estate value. How anyone can predict with such a precision during a pandemic? I am not an economist nor a real estate expert but these are the key factors I believe influence real estate market in GTA. 1) Employment 2) Immigration 3) Interest rates.
Employment and immigration will be very weak for the foreseable future. Without first two, low interest rates will have very limited impact.
As mentioned in this article, employment and income will be very low even if some parts of economy is opened because people will be hesitant to go out due to fear of unkown. Travel, tourism, entertainment, food, majority of shopping, etc. will be badly affected. Take airbnb houses – most of them will be vacant for at least an year from now and majority of them will be in the market for sale. The same happens with many small business places.
A friend commented: “people in GTA borrow money for a home even if they don’t have food on the table”. That is the only factor that might save the housing market but how much is still a big question like the end of COVID-19.
This is a very sound analysis. Remember that the banks have balance sheets with very high mortgage exposures. The incentive is to create a sense of confidence even when there’s no rational reason for it. A downward spiral due to low confidence and low volume similar to the Great Recession is what the banks and government are trying to avoid at all costs by extending the credit cycle and putting out forecast numbers like that. There are no models for this. Any model is an opinion, and every opinion has a bias. The numbers should speak for themselves. And from a structural perspective, your comment about rent vs food is quite accurate from ad-hoc discussions.
People in GTA borrow money for 3/4 generations to reside in a Mn dollar box and house poor. No furniture, no food on the table. But also have 100K SUVs also on their driveways. Most have no income and pay no taxes .
Don’t forget the number of these people who are house poor that use the food banks because they have no money remaining. Or worse, use the food banks even though they have money.
Just throwing that out there.
Lower Brainland, BC house prices only go UP on 2yr basis!! UP!!
Ignore these analysts who have been wrong for years.
Tulips would look great in your front lawn.
I don’t think all real estate will decline. Demand for retirement bungalows and condos could soar even more from the continuing aging population, lack of decent apartments to rent and the terrible covid lock-downs in retirement residences people are witnessing. Yikes … I will stay in my house as long as I can thank you. Small communities within striking distance of cities will benefit big-time as city people want out as property taxes and crime rates explode! Crime rates are all ready up in some cities 50% from last month. A place to grow a garden might be comforting to buyer’s as well.
Lack of decent apartments to rent? In my city (Victoria) Arbnb units are flooding into the long term rental market already.
If operating a chain or restaurant was the only thing profitable, and 1 in 10 are closed now – and people no longer need to live next to their workplace, why are people paying premiums to live in major cities?
The fabric of what makes cities deserve a premium is torn. The whole market needs re-assessment in this situation.
I think real estate in Canada is all based on consumer confidence, if people think it’s going to go up, they’ll buy. If they think prices are going to go down, they won’t buy. Simple as that
The majority of the newer dt Toronto condos are ghost hotels with at least 25% STR as opposed to long-term residential units, whether rental or end user.
With whole apartment unit Airbnb’s being dead for the foreseeable future due to covid-19 and city by-laws enforcement, there are 15,000 units in the dt core that could be added to the supply that will definitely help ease some of the very low LTR vacancy rate.
Depending on when they purchased the units, I think post-2014 Airbnb buyer/owners will be cash flow negative if they have to go semi-long term, LT leases or even executive rentals as I don’t think they’ll get the usual price premium for furnished units as the competition will be intense from dedicated hosts who have contractual corporate clients.
So there’s the big possibility that those 15,000 units will be split between LTR units and hitting the resale market for sale.
There’s already 15,000 unsold pre-construction units in 2020, with the possibility of up to another 15,000 additional units.
In all likelihood, the above along with higher unemployment will also reverse the rents that rose about 10% a year from 2016 to 2019 back to $30-36 PSF/annum.