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episode # 211

COVID-19 (Coronavirus) and the Vancouver Real Estate Market with Economist Helmut Pastrick

The new Coronavirus, which results in COVID-19, is causing major uncertainty in the global economy and has the potential to trigger a large-scale global recession. But should we be ringing alarm bells just yet? And what does this mean for our real estate market in Vancouver? This week, we catch-up with Central 1 Credit Union’s Chief Economist, Helmut Pastrick, to talk best case/worst case scenarios, potential rolling recessions, how markets are responding to media and quarantines, and whether or not you and your money should stay home! At the very least, you should! This is a surprising conversation that will undoubtedly influence your plans for 2020. Listen up! And on a serious note, regardless of your age or vulnerability, please do your part and avoid large crowds and wash your hands. Take care, everyone – VREP

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Episode Summary


 

Can you tell us a little bit about yourself?

I’m the Chief Economist at Central 1 Credit Union, which provides services to all credit unions in B.C. and Ontario. We monitor the economy and the housing market for our member credit unions.

On the economy side, should we be afraid of COVID19 (Coronavirus)?

Not afraid, but concerned, yes. It has so far led to a downgrade in our predictions on the economy in 2020. The travel agency especially has been hit hard. Vancouver has a large cruise ship industry and that will affect the city as a whole. People will be less likely to gather in large numbers, especially due to the many cancellations of events. Our economy is relatively small and really depends on other markets. China is such a large market that it will affect us greatly.

On the other hand, interest rates have come down. The housing market as a whole has improved. The housing market was picking up pre-COVID19 and has gained momentum since then. Prices have continued to rise. There’s also been a change in the stress test. For insured mortgages, the benchmark rate will be based on the market rate, rather than the bank of Canada’s five year fixed rate. This shift will result in a lower rate, in turn improving the accessibility to mortgage financing.

Typically, sales will pick up in the spring, but the supply has remained low since last year. I’m expecting an upswing in prices.

Do you see COVID19 (Coronavirus) as the biggest threat to the Vancouver real estate market and economy in 2020?

I would think so, yes. Though we have also had an oil price war develop recently that has hit the market quite hard. It should be temporary though; 2021 should have better economic outcomes. After a few months when the virus’ effects on the supply chain are felt less, things should pick up. Most people expect this to happen by the second half of 2020. There may even be a rebound of the market.

We saw the biggest decline of the stock market since 2008 on Monday. Is COVID-19 (Coronavirus) going to cause a financial crisis?

It’s not like the great crisis in 2008. 2008 was a credit crisis but that’s not happening here. It’s a demand shock, with people withdrawing from the market and the supply chain being disrupted. More importantly, it’s temporary. We’ll get through this. There will be a vaccine developed eventually and activity will resume. There’s a lot of algorithmic trading by computers and that causes overreactions by the market overall. For those with the right time frame and approach, this is likely a buying opportunity. For most of us though, we should just ride it out.

Is there any relationship between the COVID-19 (Coronavirus) stock market declines and real estate?

The economic relationship is quite minimal but it’s more on the psychological side. The substantial movements in financial markets can have an effect on the housing market. People will often want to wait for the market to settle before making a big purchase or decision.

Do you think that the money will be redirected into tangible assets?

To some extent. Gold is probably a good place to be, as well as real estate. Government bonds as well.

At your most pessimistic, how does COVID-19 (Coronavirus) affect the Economy and housing market in 2020 and 2021?

This pandemic spreads and lasts throughout 2021. The other continents continue to get infected at mass rates, especially in places like Africa or South America where their health systems aren’t as well equipped. It could become much worse. We could see a global recession. You see what’s already happened to the travel industry – you’ll likely see the same in the restaurant and hotel industries. We’ll see interest rates lower to closer to zero. But you’ll also see unemployment rise and the housing market will also stall.

Continuing down the negative road, what kind of tools do you see governments using on the economic side to combat COVID-19 (Coronavirus)?

Monetary policy can only go so far but we will see a fiscal response. There will likely be relief for businesses and some regulatory changes in terms of taxes. The Canadian government should be putting out a budget in the next few weeks, so we’ll see what comes of that. Canada’s federal debt is not exorbitant and can manage higher spending. If we incur more debt, we can deal with that in the future, but we need to get through this now. I would expect to see the same in other countries. But that won’t sure things, only mitigate them.

We may be able to weather the storm better than other countries, what does this say about the long-term outlook on our economy?

I don’t think it’ll have a huge effect on the future; most of the effects of this virus will be temporary. I hope it will help our health systems be better prepared and maybe encourage people to be better about personal hygiene. Climate change will have a much larger effect on the economy. We are well-positioned and have a favourable reputation around the world. We also have a good immigration policy that will mitigate the results of the baby boomer generation’s retirements in the next few years.

Does this situation remind you of any other times in your life?

Two come to mind, 2008 and 1981/82, when there was a global recession when inflation was “broken.” Interest rates were gigantic, up to 20%, trying to stop the rate of inflation. That completely outclasses today though. 1982 was worse than 2008, and this is ranked lower in severity.

How has the role of the media factored into the economy and influenced the market?

We have instant news and that moves the market very very quickly. The internet has accelerated everything. In some ways, it helps; it allows everyone to be much better informed of what’s going on. Though there’s potential for misuse and misinformation to cause damage. You need to pay attention to your trusted sources and ignore those who have a poorer history.

What is your economic forecast for B.C. at the end of 2020? What about 2025?

Assuming that cases begin to diminish, there will likely be a pickup in Q3 or Q4, if not 2021. Though it’s probably less than 2% growth overall. Unemployment will also likely tick up a little bit. In five years time, I think the economy will be about 10-15% higher than today. Unemployment will be lower by then as well. We may well have another recession between now and then.

When it comes to housing, I think that housing activity will be higher this year than last. Prices will go up about 10%, mainly in the Lower Mainland, Victoria and Kelowna. In five years, they should be up 25-30% higher. The interest rate should remain lower, but likely raise a little. Affordability, measured by a few factors, will likely worsen in both the short and long term. Our supply compared to our demand growth will force housing prices to rise faster than incomes will. We need more supply, especially rental units. I predict that the units will keep getting smaller and smaller as well.

Any thoughts on the B.C. strata and condo insurance situation?

I don’t understand it completely, but it seems that the major insurance agencies have incurred a lot of losses recently, and the best way to make that up is with increased premiums. Much of this is due to climate change, through floods and fires. It’s only going to get worse over the decades and there may be a case for governments to step in.

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This Post Has 4 Comments

  1. Good to hear wise and re-assuring voices at this time. Agree that the demand shock and supply disruption is temporary. The energy sector appears to be challenging for the immediate future.

    Can BC hope for some settlement in softwood lumber trade?

    1. It’s not wise advice he just wants to keep doing mortgages. It won’t be long be people realize they may lose their jobs and hold off on every major purchase.

  2. You are wrong and should hedge accordingly. This will be bigger than 2008. Does anyone inderstand the bond and repo markets? We have everything in a perfect storm, banks in EU close to default, massive sovereign debt, global debt, consumer debt, deflation, a global pandemic, job insecurity, consumer convidence dropping daily. Governments trying to encourage more consumer spending ie. debt. We are setting up for a total global economic reset. And by the way the energy sector is toast!

  3. I remember the 70s and 80s recessions well Was involved in developments in usa and Canada from1970’s to 2000 on.
    The referred to 2008 recession internationally and in America we are still weathering . Canada and Vancouver were well insulated then. There is no insulation from the pandemic or our insurance issues.
    We are and will feel it strongly, there are already many (dozens ) strata with no insurance unable to sell. I wonder how they will look after someone dies in them after the pandemic or how banks will foreclose. I think Helmet should be embarrassed to suggest he doesnt understand. The rest of the industry does.
    Robert

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