The Great Reopening has begun, but what does that mean for Canadian real estate and the Canadian economy at large. Welcome back Prof. Murtaza Haider who joins Adam & Matt to talk economic recovery, Canadian debt levels, and CMHC’s projected 18% decline in real estate prices. Is it time to buy or sell? Tune in to find out!
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Episode Summary
Who is Murtaza Haider?
Murtaza is a Professor at the Ted Rogers School of Management, Ryerson University and a Director at the consulting firm Regionomics. He is also the co-author of the Haider-Moranis Bulletin, as featured in the Financial Post.
His research is based in the fields of real estate and transportation using data and analytics.
How is the Canadian Economy dealing with COVID-19 (Coronavirus)?
The Canadian Economy could be compared to the emergency room of a hospital. It hasn’t gone into long term care and everything is happening very fast. Everyday we realize that we forgot to take care of this, or we forgot to take care of that. The Government is trying to make sure there is not a significant decline in consumption. If businesses stop consuming or spending money, then we have a really big problem and a big slow down in the economy happens. The slow down right now is because of the restrictions of movement we have imposed on ourselves; restaurants can’t have guests and sports are on hold.
Back in mid-March it was very difficult to forecast what would happen with this virus. There were many unknowns. We didn’t know a lot and we didn’t know what we didn’t know. Under these circumstances, the Government of Canada had to plan things. From a positive point of view, we don’t see people on the street, people without shelter, people going hungry. This was a possibility, but this is not happening. Under these circumstances, Canada is doing quite well at the moment and the Government has come to the rescue of Canadians.
What does the rest of 2020 and 2021 look like for the Economy in Canada?
When we look at what people have received in Government support since this crisis started ($250 billion plus in Canada; $2 trillion plus in the USA). All this money is not printed, it is borrowed money, or sovereign debt. This money will need to be repaid. After the initial shock has subsided a bit, people are getting their courage back to try to return to daily life. The next 6 months will be about how we start the large engine of the Economy. Restarting the Canadian Economy will be a very challenging task. How do you reopen and restart while also keeping your eye on new virus cases and health of workers? The Government needs to start opening the economy, collecting taxes and starting to pay back some of this money.
Has anything surprised you about the Canadian Real Estate Market’s response to COVID-19 (Coronavirus)?
It was surprising to see such a large decline in sales. Sales declined by approx. 70%-90%, because people were worried for their safety and decided to stop showing homes and stop seeing homes, causing the decline. It took some time for people to make the transition from seeing a house in person to deciding to buy a house based on photos and online videos and information. People are now buying homes based on the information found online or via cell phone videos and virtual tours.
Also, in a crisis, people become economists. They immediately feel house prices will drop, so the buyers decide to hold off on making any purchase decisions to avoid overpaying for their home. The sellers also disappear because they feel they will get less in the market and decide to wait out the crisis until the market rebounds. Both of these actions cause a freeze in the market even further.
What was not surprising was the lack of decline in house prices. House prices have remained relatively stable. Prices are like wages and they are very sticky. Even if we see a lack of sales volume, you will not see the same reduction in house prices because people’s wages remain relatively constant.
Do you agree with CMHC’s recent projection saying Canadian home prices may drop by up to 18%?
Let’s start by saying that the economists at CMHC are among the best real estate economists in the World. They are brilliant people. So, if they are saying there is a possibility of a drop in home prices in Canada, there must be merit for it. My personal opinion is that real estate prices will not drop that much over the next 12 months from what I am seeing. For prices to drop, you would need to see product being offered, with no buyers willing to buy it. For example, if the buyers disappeared, but there were still lots of listings on the market, we could expect prices to drop. In the case of the COVID-19 crisis, we are seeing both buyers and sellers disappear due to safety concerns. When both demand and supply are put on hold, this would be classified as a market freeze. The bad economic news is still there, but the market is frozen until the economy is started again. It is not as likely for prices to drop in this scenario, because you would assume that buyers and sellers will return to the market at the same time, after it is safe to do so. There are also buyers that may have sit out during the 2008 crisis that will see this COVID-19 crisis as an opportunity that they don’t want to miss out on. The fear of missing out becomes a reality in people’s minds.
At the end of the day, markets have to resume. The borrowing that governments have done to sustain these relief packages requires the economy needs to be working again. There will be a vested interest in getting the economy going again, which would include the housing market being kick started.
What do you think of the timing of CMHC’s announcement?
The timing of the CMHC announcement is critical. For example, soon after September 11th, George Bush spoke to the nation in the USA to tell people to not fall into despair and to keep living their lives, going to restaurants, going to the movies. This was good advice to ensure the flow of money to the economy in the USA.
Right now, the governments are in the same mode. They need to provide incentives to businesses to hire people and spend money. People need to spend money and the economy needs to continue operating. CMHC is telling people that prices are going to go down and we are seeing the possibility of down payment amounts increasing for home buyers. This seems that it will have a negative affect on people and cause people to stop spending money and not buy that house right now. This seems counter intuitive to what the Canadian government is trying to get people to do, but I know that CMHC has some of the greatest economic minds working on these forecasts and it is hard to question their conclusions. Over time, we will most likely learn what they knew when drafting these forecasts that us ordinary citizens did not know.
Which cities will outperform the Canadian real estate market projections and which cities will be hit the hardest?
To outperform, the housing sales activity would need to resume faster, and the prices would start to appreciate more quickly. Whatever Province would be able to get their economic engines started quicker will have a leg up and start to see their real estate markets wake up quicker. There will be great challenges for Alberta because they have been prevented from exploiting the resources they have, which has led to a major slow down in their economy. That will have a direct impact on their housing market which will continue after COVID-19. There will also be challenges in the eastern provinces as well.
Ontario may lead the recovery, because we don’t yet see any significant damage to the economy. In Vancouver, there is a sizable population that wants the market in Vancouver to weaken, thinking that this is how they will be able to afford housing. This is incorrect and a drop in prices will not allow people to transition from renting to owning. Once a market become unaffordable, it will remain out of reach. In this situation, it is important to have an affordable rental market that will allow people to live in an equitable society, allowing everyone to have shelter. To see a modulation of rents in Vancouver and Toronto might not be a bad thing to provide housing to people in the essential services sector, including firefighters, teachers, restaurant workers to have affordable rents and adequate housing.
If you are thinking about recovery, you would want the definition of recovery to include, an increase in sales and prices as well as an increase in rental affordability. This will create a city you would like to live in that is affordable for you and your neighbours.
The news reports that Canadian’s are very much indebted and the minimum down payment for a mortgage may be raised. Is household debt the biggest challenge facing the Canadian economy going forward?
Yes, Canadian debt is high, but Canada does not have the same economic shocks that the USA has, because we have some socialized programs like health care and public schooling. If someone lost their job in the USA it would be more critical than a similar person losing their job in Canada. Heavy debt levels are a concern, but not the same concern as they are in the USA.
When you raise barriers to purchasing homes, for example, raising down payments from 5% to 10%, it means that people will take longer to save up to purchase a house. Whatever their current status is, if they are renters, they will be renters longer. This would increase pressure in the rental space and rents would not decrease even if there was an economic shock like a pandemic.
In the case of a pandemic recession, the goal is to get people to spend money. If you raise the bar to purchase a home from 5% to 10%, people will be saving longer and not spending this money in the economy. Therefore, by the Canadian Government raising the minimum down payment for home buyers appears to be counteractive to their best economic policy during a pandemic. It also forces people to move further away. If you can’t afford the house you wanted in the city anymore, you will move further out to get the home you want with a commute. If you are a city that is trying to stop urban sprawl, raising the down payment is also counter active for you.
COVID-19 (Coronavirus) has caused a decrease in ridership for public transit. We have started to see some cities announce moving away from cars. How do you see transportation changing in cities in the aftermath of this crisis?
Public transit systems are facing drastic shortfalls. There is an 80%-90% decrease in ridership in Toronto and other large cities. Transit is being operated with a reduced schedule, but they are having large deficits due to COVID-19. In a post COVID-19 world, we will not see packed subways and buses in the short term. There will need to be restrictions to keep people safe. The capacity of these systems will decline, which will get people to look for other options.
Two options that people will look to are an increase in cars and an increase in telework (working from home). Growing cities result in an increase in demand for mobility that outpaces the ability for cities to provide infrastructure. Cities are trying to meet the demand that existed yesterday and will always be behind when providing infrastructure for roads and other forms of transportation. The catchup has never happened for any city in the World. You can’t build your way out of it.
Telework is emerging (partly due to this crisis) as a viable opportunity for people in many fields. This can have a dramatic affect on people’s ability work without wasting time commuting and spending time packed like sardines on crowded subway platforms. Cities need to save public transit now so that it is there when the economy resumes, but we also need to continue to explore telework, which will enable people to be equally productive at home without having to commute on a daily basis.
Find out more about Murtaza Haider, Regionomics, the Haider-Moranis Bulletin and Urban Analytics Institute.
You can also find the recently published study on telework here.