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episode # 261

Another Record Year in Vancouver Real Estate with RBC Senior Economist Robert Hogue

With bidding wars, record low interest rates, frustrated buyers & ecstatic sellers, where does the Vancouver Real Estate Market go from here? RBC Senior Economist, Robert Hogue, sits down with Matt & Adam to discuss the Canadian economy at large, super-charged demand for housing, and the biggest risks facing Vancouver buyers and sellers. Which Canadian markets will outperform? Can prices continue to rise at an astronomical pace? How will the opening of the border impact our economy and housing? And what does this mean for homeownership and affordability in our country? Join us today to try and make sense of these questions and this historic moment in Vancouver Real Estate & Beyond.

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Episode Summary


Tell us about yourself.

I’m a senior economist at RBC and have been covering the Canadian housing market for the last 12 years. Prior to that I covered industrial sectors as an economist at another bank. So I’ve amassed quite a bit of experience as an analyst of the housing market.

How’s the Canadian economy doing?

It surprised us in the late stages of 2020. We expected things to recover slowly through the fall but the data coming in is very encouraging. The second wave and return to lockdown in the last months of 2020 will likely make those months look a little weak – data is usually a bit delayed so we don’t have those numbers yet. But hopefully with the uptick in vaccines, we hope the worst is behind us and we’ll see more vigorous recovery the rest of this year. 

What do you think the next 2-5 years will look like?

We expect to see further progress but there are a few question marks out there. The big one is about economic productive capacity. Governments have provided a lot of support and we’ve had minimal bankruptcies, but it’s unclear how many businesses we will lose permanently. Once we’re through the pandemic and the economy is back to normal, we’re not sure what that productive capacity will look like. If we lose a certain percentage of businesses, that will slow things down.

But if we look at things like immigration, we’re expecting that to bounce back significantly, at least by 2022/2023. So that will trigger economic activity. So we’re bullish on the medium to long term prospects of Canada. But there are challenges we’ll face. 

You recently published a report, “Canada’s housing market headed for another record year in 2021.” Can you tell us a little bit more about what you’re seeing and your methodologies?

Housing markets across Canada surprised us in 2020. No one thought we’d see record sales and prices when the pandemic first hit. But we’ve been seeing hot markets, low supply and prices on the rise. The pent up demand from spring 2020 resulted in a lot of activity in the latter half of the year. The market ended the year on a very high note. All indications tell us there was no let up coming into 2021. 

Low interest rates are definitely a factor. The Bank of Canada is telling us that there won’t be a rise in interest rates anytime soon. 

There’s also been a lot of churn due to the pandemic. For example, people who are spending more time at home are now looking for more space; their housing needs have changed. So we’ve seen moves from urban centres to the suburbs as the search for affordability and space takes people farther away. And these changing housing needs are still very present. 

A third factor is household savings. Last spring, we worried that the pandemic would cause a lot of financial hardship for households. But with government programs and a lack of buying (e.g. less going out and no travel), we’ve seen a lot of household savings grow. So there’s a lot of money available to spend on housing. 

That’s why we think 2021 is going to be even stronger than 2020. Through the year, we’re expecting the level of activity to cool gradually but overall it will be stronger than last year. 

Currently, supply is a restraint; there aren’t enough units out there. Interest rates aren’t rising in the short term but we do expect them to creep up in the second half of this year. So that may have a cooling effect on demand. We also expect affordability to be an issue. 

Can you talk about how the pandemic has changed Canadian debt levels and where we’re at now?

Well, it’s hard to tell now as the pandemic has distorted many metrics, such as debt to income ratios. We’ve seen savings go up as well as household incomes, but those “incomes” may be due to government transfers. So this metric is distorted. Things look better but these government transfers are not sustainable. The question is, where will those metrics land once the interventions end? 

My best guess is we’ll return to a pre-pandemic ballpark. But I don’t think we should just look at the debt to income ratio. It’s better to look at debt service costs. However with low interest rates, the debt service costs aren’t likely to surge. So the debt picture looks good right now but it’s not a true reflection of underlying conditions. 

How does the Canadian government recover from this debt?

The best method is through economic growth. So once the economy kicks into higher gear and we see more productivity and growth, that’s the best way to tackle debt. But there’s quite a bit of uncertainty there. Being able to count on low interest rates helps. 

In terms of housing, what regions will outperform the larger market in the next 1-2 years?

Where population growth has been strongest and will be in the future, like BC and Ontario, are markets where we’ll see a potential for growth. In places like Montreal and Ottawa, prices were rising rapidly pre-pandemic and they haven’t missed a beat throughout the pandemic. So we may need to talk about ways to cool those markets before affordability erodes. In places like BC, prices are likely to rise further. But they’re not rising quite as fast as elsewhere. 

We’re looking at apx 8.4% increase nationally and 8.6% in BC for housing prices.

What is the greatest risk to the housing market in 2021?

The big elephant in the room is the pandemic. We’re seeing encouraging numbers but it’s too early to say we’re out of it. New variants or ineffective vaccines could spell trouble. 

On the other side, if vaccines work well and help us tackle the pandemic quickly, we could have a wave of euphoria. The economy could run hot for a little while with low interest rates, economic activity and job growth before it tightens again. And if the gates open, we could have immigration rates rising and bringing people back to the downtown cores. 

What’s the story on downtown cores?

We’ve seen a big movement towards the suburbs and even further away, which has put a lot of pressure on smaller markets. With smaller markets, it doesn’t take much to put pressure on them and see prices spiking. 

In the core urban areas, it’s a tale of two markets: single family homes and condos. Condos have cooled in large part due to rentals. With no immigration, students living at home and no short-term vacation rentals, the rental market has been hugely affected during the pandemic. So there’s more vacancy and downward pressure on rent prices. In my book, that’s not necessarily a bad thing. For renters and the long term health of the market, it’s not a bad thing that rapid rent increases have cooled. 

When you think of 2021 and beyond, some of these factors will stick around. For example, working from home will probably become a permanent reality for some. But interestingly, in the last few months we’ve seen a return in the sales of condos. That may be a reflection of no inventory of single family homes and the news of vaccines may have signaled some investors to get back into the market. 

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