rennie landscape spring 2021
Dear Reader, Welcome to the spring 2021 edition of the rennie landscape. We are now one year into Covid-19 and there is finally light at the end of the tunnel—and it isn’t an oncoming train. Canada’s labour market has slowly but surely regained most of the jobs lost during the first few months of the pandemic, social gathering restrictions in British Columbia are being incrementally loosened, and vaccinations have begun. By the end of 2021, it is likely that our world will resemble the one we left behind in February 2020. Having said that, there are some legacy effects of Covid-19 for Metro Vancouver and other metros across the country. This includes expanded future immigration flows, elevated household savings, and diminished new and resale housing supply. The question of whether inflation will return with a vengeance is a fair one, with the jury still being out. While a temporary surge may be experienced in the coming months, it is unlikely that sustained consumer price increases will become the norm; in such a case, interest rates will continue to be lower for longer. This in turn will make it easier for households to participate in Metro Vancouver’s housing market, including those looking for a bit more space and those buying their first home. There is much to look forward to in the coming months: the days are getting longer, the air is getting warmer, and together we’re getting closer to being closer together. We hope you enjoy this edition of the rennie landscape. As always, continue to be safe and stay positive.
Ryan Berlin DIRECTOR OF INTELLIGENCE & SENIOR ECONOMIST email@example.com
CREDIT & DEBT
01. economy Not surprisingly, early incremental (re-)gains in employment in Metro Vancouver have been replaced with much slower growth. Still, it is growth nonetheless.
EMPLOYMENT: UP, UP...HOORAY
Twelve months into the pandemic, and employment across Canada remains below pre-Covid-19 levels. The fact that such a statement likely elicits nary an eyebrow raise is a testament to the reality of the past year: we have somehow become comfortable with the notion that we have been going through the worst economic downturn since the Great Depression. What’s more, we implicitly agreed to do it to ourselves. Our collective ambivalence towards our economic circumstances—they are painful but temporary, afterall—likely stems from two sources. One, there were no great imbalances in our economy heading into this Great Suppression: unemployment was low, but not so low as to overheat the labour market; interest rates were low, but not so low as to over-encourage risky borrowing; and real GDP was plugging along at below- historical averages. Two, fiscal and monetary policies were enacted from the outset of the pandemic to bridge the gap from “here” (pre-Covid-19) to “there” (post-Covid-19).
In other words, more-than-adequate financial reinforcements flooded in. Furthermore, jobs in Canada’s major metros have continued to recover after bottoming out in May, although the pace of recovery has varied somewhat over the past 6 months. In Greater Toronto, for example, employment was only 2% below pre-Covid-19 levels in September, but is now 6% lower. In Greater Montreal, employment was 2% below its pre- Covid-19 level in August and, after a slide backwards, is again only 2% below February 2020. In comparison, Metro Vancouver has been the little engine that could, with a bigger crater carved into the region’s employment landscape early on and a slower initial recovery being replaced by continued job growth that now has employment only 2% below February 2020’s level. It’s good news for the local economy and housing market, but there is still a ways to go.
(SQUARE) ROOTING FOR METRO VANCOUVER’S JOB RECOVERY
MONTHS SINCE THE PANDEMIC BEGAN
DATA: SEASONALLY-ADJUSTED TOTAL EMPLOYMENT INDEXED TO THE BEGINNING OF THE GREAT SUPPRESSION (FEBRUARY 2020, WHERE EMPLOYMENT =1.00)
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA
TAKING STOCK OF THE EMPLOYMENT SHOCK The unique profile of job losses over the past year has had the perverse consequence of shielding the housing market from the worst effects of the pandemic.
Within the first couple of months of the pandemic, young, part-time service sector workers were being disproportionately impacted by our Great Suppression. As these were not your average home owners or buyers, the for-sale segment of our housing market had (and has) been spared the worst effects of the downturn. So where do things stand today? On a sectoral basis, jobs in hospitality and trade were down 6.9% in February 2021 versus February 2020, while employment in all other sectors was actually up by 1.1%. When looking at age groups for those employed, under-25
employment was down 2.5% one year after the arrival of Covid-19, while the number of employed people aged 25 and over was down only 0.3%. Interestingly, full-time (F-T) employment has fallen by 1.6% in the past year, compared to a 3.2% increase in part-time (P-T) workers. This represents a change from the early days of the pandemic when P-T workers were most negatively-impacted—good news for those who truly want to be working P-T, but suggestive of lingering challenges facing employers and their F-T employees one year into Covid-19.
BC’S JOB-LOSS ARCHETYPE: YOUNG PEOPLE IN SHOPS, CAFES, AND HOTELS
Hotel, Resto/Cafe, Retail, Wholesale
All Other Sectors
DATA: FEB 2020 - FEB 2021 EMPLOYMENT CHANGES, SEASONALLY-ADJUSTED
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA
ON THE MEND AND BACK TOWARDS TREND Metro Vancouver’s labour market has been resilient over the past year but is still a ways away from its pre-pandemic potential.
The most singular measure of the health of the labour market—and arguably of the economy—is the unemployment rate. When it’s low it usually means everyone who wants to be working is working, companies are hiring, wages are rising, and the economy is growing; when it’s high, the opposite of all of that is usually true. And things were indeed going very well in Metro Vancouver in early 2020, with the unemployment oscillating healthfully between 4-5%. Subsequently, as employment fell by 18% between February and May, the
unemployment rate surged to 14.6% over the same period—not good. The unemployment rate has fallen dramatically since then, sitting at 7.7% in February. And though the number of discouraged workers in this province recently reached an all-time high (these are people who have dropped out of the labour force due to lack of success looking for work, and thus are not counted in official unemployment statistics), signs are on the whole pointing to a labour market that will hopefully soon resemble the one that was running so smoothly one year ago.
AFTER THIS LAST UNEMPLOYMENT RATE SPIKE, THE ECONOMY NEEDS CPR
THE GREAT SUPPRESSION
2009 2010 2011
2012 2013 2014 2015
2016 2017 2018 2019 2020
DISCOURAGED WORKERS BC
UNEMPLOYMENT RATE METRO VANCOUVER
DATA: METRO VANCOUVER UNEMPLOYMENT RATE ADJUSTED FOR SEASONALITY; BC DISCOURAGED WORKER ESTIMATE UNADJUSTED FOR SEASONALITY, 12-MO MOVING AVERAGE SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA
UNEMPLOYED? LET ME COUNT THE WAYS Supplemental measures of unemployment help paint a fuller picture of the toll the pandemic has taken on BC’s workers.
As noted on the previous page, while the “official” unemployment rate, and changes in it, is a good barometer of the health of our labour market and how it has been evolving over time, it doesn’t capture the full experience of workers and would-be workers, and thus has limitations associated with its interpretation. Fortunately, other measures of unemployment in Canada exist. In fact, there are eight measures of unemployment (Statistics Canada gives them alpha-numeric codes ranging from R1 to R8) that measure along a spectrum the extent of short-term unemployment (at one end) to broader definitions of labour underutilization (at the other end). For British Columbia, the most recent measure of R4, the official unemployment rate, is 7.5%, up from 5.4% one year earlier. Implicitly this includes people who have been unemployed for at least one year (R1, the lowest of all measures, most recently at 0.9%) as well as
those unemployed for three months or more (R2, at 4.1%). Most telling, however, are the rates at the other end of the unemployment rate spectrum—specifically, the R8 measure. This is the highest measure of unemployment we have, including as it does our “official” calculation of unemployment as well as those who are discouraged (i.e. drop-outs from the labour force due to a lack of success in finding work), those who are waiting for call-backs from potential employers and/or waiting to start work in the longer-term future, and those actually working in part-time jobs at a full- time equivalent level. By this measure, labour underutilization in BC was most recently 11.2%, up from 7.7% a year ago. Regardless of what our official unemployment rate (R4) tells us over the coming months, it is movements in R8 that will more genuinely reflect conditions facing British Columbia workers.
UNIMPRESSIVE UNEMPLOYMENT RATES BY ANY MEASURE
R unemployment 1+ years
R unemployment 3+months
R comparable to US rate
R official rate
R R4 +discouraged searchers
R R4 +waiting group (recall, replies, etc.)
R R4 + involuntary part-timers (in FTE)
R R4+R5+R6+R7 (single measure of labour under-utilization)
SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA DATA: UNEMPLOYMENT RATES, BRITISH COLUMBIA, UNADJUSTED FOR SEASONALITY
DE-CONSTRUCTING THE HOUSING INVESTMENT NARRATIVE Much ado is being made about the extent to which Canada’s housing market—is there actually such a singular thing?—has heated up over the past year. With average sold prices having risen by 15% in Greater Toronto, 16% in Metro Vancouver, and by 26% in the Ottawa area, this view that markets are running hot is fair. This despite immigration to Canada having halved in 2020 and employment having suffered its worst losses in almost 100 years in the spring of last year. Hot, perhaps, but there are a few good reasons for it. As this report notes more than once,
by upwards of $200 billion over the final nine months of 2020—by far the greatest expansion of our collective rainy day fund in our nation’s history. As part of this, incomes were boosted above what they had been for many households prior to the pandemic and interest rates fell for everyone. Additionally, stock market volatility in the early days of the pandemic has likely enhanced the attractiveness of real estate as, at the very least, a wealth-maintaining asset class. Notably, this heat hasn’t manifested in residential construction. In Metro Vancouver, the average monthly value of residential construction investment (of $990 million) in 2020 was down 12% versus 2019 and 8% versus 2018. While this is up by 18% versus the past-decade average, it seems clear for now that our eggs aren’t all in the real estate basket as we climb our way back to our pre-pandemic economy.
unprecedented relief measures implemented by the federal government and provincial governments were complemented by the most aggressively-dovish monetary policy the Bank of Canada has ever embarked on, resulting in household savings that ballooned
A surge in residential construction investment has not materialized through the pandemic. Perhaps this is a good thing.
DOWN WITH THE HAMMERS & SAWS: RESIDENTIAL CONSTRUCTION HITS PAUSE
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
AVERAGE MONTHLY RESIDENTIAL CONSTRUCTION INVESTMENT
SOURCE: STATISTICS CANADA DATA: INVESTMENT IN RESIDENTIAL CONSTRUCTION, BRITISH COLUMBIA, SEASONALLY-ADJUSTED
STOCK MARKETS: MORE VOLATILE THAN MY 6-YEAR-OLD SON Uncertainty in global equities markets over the past year has increased the attractiveness of other assets, real estate included.
Global stock markets have been on a wild ride since the pandemic hit. After reaching all-time highs early in 2020, stocks plummeted as the economic ramifications of social distancing in response to the arrival of Covid-19 became apparent. No index was immune, with the likes of the S&P 500, Dow Jones, NASDAQ, and Toronto Stock Exchange (TSX) falling by almost 40% over the course of one month. The recovery was not as swift as the decline, but stocks generally re-achieved their pre- Covid-19 highs by the end of 2020, with the NASDAQ doing so in June, the S&P 500 in August, the Dow in October, and the TSX at the end of December. By the end of February 2021, a dollar invested in these indexes one year earlier would have returned between 1% (the TSX) and 30% (the NASDAQ ), meaning that any index-mirroring nest eggs that were held through the worst of the pandemic at worst retained their value and at best provided a tidy return. This short-term volatility but long-term retention of value has likely had two
reinforcing effects on real estate markets generally. First, the degree to which the value of stock indexes and their underlying equities are susceptible to sudden and dramatic downside changes in value was highlighted by the arrival of the pandemic; to the extent that older, long-term investors are relatively more risk-averse, this could have the effect of pushing capital into hard assets such as real estate—either for themselves or, in some case, for the purposes of helping their children access home ownership. Second, the fact that stock values recovered their early-2020 losses meant that household savings tied up in the equities market were still available to be redeployed (again, real estate being one possible vehicle). This stock/real estate market dynamic, to the extent that the above captures it, will not continue in perpetuity. However, the residential real estate market within an economy punctuated by volatile stock markets and low-yielding bonds certainly represents an opportunity.
STOCKING UP ON INVESTMENT EARNINGS THROUGH THE PANDEMIC
1.00 PREPANDEMIC PEAK
1.11 1.01 1.05
MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
DOW JONES INDUSTRIAL AVERAGE
SOURCE: YAHOO FINANCE DATA: INDEXED STOCK MARKET INDICES (19 FEB 2020=1.00)
DOING FINE HOLDING THE LINE IN BC British Columbia’s Covid-19 response has been laudable in comparison with other jurisdictions.
Early in 2020, as Covid-19 spread from one country to another, the approach adopted by governments to contain the virus and reduce demands on the health care system varied widely, from complete lockdowns in China to more passive approaches in Taiwan and Singapore. Even within Canada the approach by provincial governments varied in terms of both restrictiveness of the policies and their timing, and thanks to a measure of containment policies and public information campaigns developed by the Bank of Canada—the
stringency index—we can actually objectively compare the responses. Not surprising, Quebec and Ontario emerge as having the most stringent policies, as the total number and per capita cases in those provinces lurched ahead of the rest of the country. In BC a more measured approach had been taken relative to other provinces, with the stringency index remaining constant since November while it increased everywhere else in Canada. So far this approach has seen some success and helped BC’s labour market perform well under the circumstances.
LESSONS IN POLITICAL PARENTING FROM ACROSS THE COUNTRY
73 66 59 61
MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
DATA: COVID-19 STRINGENCY INDEX BY REGION; MEASURES CONTAINMENT RESTRICTIONS AND PUBLIC INFORMATION CAMPAIGNS SOURCE: BANK OF CANADA
THE STRINGENT CONTINGENT Where more restrictive health orders have been implemented, Covid-19 cases have been more widespread. But which came first? ›
We should all want bond yields to increase over the coming two years—it will mean our economy has recovered and is operating at its potential.
JUDGING INTEREST RATES: ALL RISE?
The monetary stimulus implemented by the Bank of Canada at the outset of the spread of Covid-19 back in March 2020 was swift and effective. The central bank’s two-pronged approach of reducing its overnight target interest rate (the so-called “policy” rate) to almost zero while embarking on a campaign of quantitative easing—in a nutshell, buying copious amounts of mostly federal government debt with the aim of supporting aggressive fiscal measures and suppressing longer-term interest rates—improved liquidity and encouraged participation in the market economy. Additionally—to far less fanfare—the Bank of Canada has consistently reiterated what it is calling “extraordinary forward guidance” as it commits to keeping its overnight rate at 0.25% until the economy returns to its potential and inflation is consistently back at its 2%-per- year target. With the Bank indicating that
its overnight rate will likely remain where it is until 2023, it is signalling to consumers, investors, governments, and businesses that short-term borrowing will remain cheap for another 2 years. Having said that, 5-year government of Canada bond yields, which tend to govern movements in fixed mortgage rates, have begun to creep upwards after plummeting from 1.64% before Covid-19 to as low as 0.32% in mid-2020. As of February 2021, for example, the yield on 5-year federal government debt was 0.73%—almost double the 0.41% in January 2021. It must be noted that this is still a near- historically low return on money that must be parted with for five years, riskless as it may be. For now and in the near-term, even with rates moving up as the economy returns to its pre- Covid-19 trajectory, money will remain cheap.
YIELDS REVERSE FIELD AND A NEW APPRECIATION FOR INFLATION
THE GREAT SUPPRESSION
BOC POLICY INTEREST RATE CMHC BENCHMARK MORTGAGE RATE
YR GOC BOND YIELD
ANNUAL CONSUMER PRICE INFLATION
SOURCE: STATISTICS CANADA DATA: SELECTED INTEREST RATES AND CANADA’S ANNUAL RATE OF CPI CHANGE
GOLDILOCKS BOND YIELDS IN CANADA As the Bank of Canada and investors have piled into debt markets, the return on long-term Canadian bonds has plummeted. But hey, at least rates aren’t negative, right?
When Covid-19 hit industrialized countries in early 2020, there was no grand plan for how governments and central banks would manage the impending economic crisis; in fact, no one was quite sure there would even be an economic crisis. Alas, it soon became apparent that social-distancing restrictions and the effective mothballing of whole sectors was going to have devastating impacts on household and corporate finances if swift and dramatic action was not taken. Perhaps fortunately—though no one spoke of it in positive terms at the time—the Great Recession of 2008/9 provided a blueprint of what not to do when the economy takes a sudden turn for the worse. Back then, concerns over the lasting harmful effects of sky-high inflation and mounting government debt resulted in almost perverse austerity measures being enacted around the globe when what was needed was extreme stimulus. (To be fair, some central banks engaged in quantitative easing programs of a magnitude that had not been seen before.)
The sluggish “recovery” coming out of that recession yielded some lessons learned, and when it became clear one year ago that substantial financial relief measures were needed to ensure that a short-term illiquidity problem didn’t become a long-term solvency problem, governments and central banks acted. Concerns about growing government debt went by the wayside as central banks committed to keeping interest rates low for the foreseeable future. In Canada, the federal government has spent more than $250 billion supporting the economy, with the Bank of Canada providing the liquidity. This has depressed longer-term bond yields, with Canada’s 10-year government yield most recently sitting at under 1.09%. As low as this is by historical standards, it isn’t the lowest among other industrialized countries by a long shot, with Germany and France experiencing negative yields on this longer-term debt. Canada likely won’t see negative interest rates any time soon, though there also isn’t significant upside for yields in the foreseeable future.
THE YIELDS THAT BOND US: CANADA ON THE RISE
CANADA UNITED STATES
LOW SINCE MARCH
HIGH SINCE MARCH
DATA: 10-YEAR GOVERNMENT BOND YIELDS, MONTHLY
SOURCE: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
It is likely that bond yields have already achieved their floor. Rising returns for risk-free lending will have impacts on other interest rates throughout the economy.
DISCOUNTING THE PANDEMIC’S IMPACTS So-called “posted” mortgage rates—the ones banks use to flirt with would-be new customers and refinancers—are, as we all know, not what ends up on the contract. However, because information on posted mortgage rates is so widely available, they are often the rates cited to describe changes in the cost of borrowing (and by extension how purchasing power is affected). Of course, banks will typically offer discounted rates to consumers—rates that are, in some case, significantly lower than their posted counterparts. As these are the rates codified into mortgage contracts, they deserve more of our attention; alas, the window into the world of discounted rates is somewhat opaque.
However, we do know that on average discounted rates have fallen mightily since the beginning of 2020, going from an already- low 2.50% for the 5-year fixed to 1.39% most recently. For variables, they can be had for as little as 0.99%. They will not stay here forever. In fact, there is evidence they have already started to creep up. This will marginally negatively impact buyers’ collective psyche and their purchasing power—though it’s important to point out that we still live in a world of ultra-low interest rates and will for some time.
RATES ARE LOW BUT ARE SET TO GROW
DATA: DISCOUNT MORTGAGE RATES
A TEMPORARY VACATION FROM INFLATION Fears about rising inflation in a low-inflation environment are akin to paying interest on debt before it’s due.
Much speculation has been swirling about the impact on consumer prices that the expansion of the country’s money supply and the reduction in interest rates will have. That there is debate is no surprise; as noted in the previous pages, interest rates—both short- and long-term—have been at record lows, and as noted in the following pages, federal government deficit spending has been downright unprecedented. Notably, runaway inflation did not characterize any part of the period between the Great Recession of 2008/9 and the Great Suppression of 2020, despite what
was at the time, in 2009, monetary stimulus without peer. After experiencing deflation in April and May of 2020, prices have since been rising, though at a muted pace (most recently at 1.0% annually). Where there have been increases (recreation, shelter, health care, and food, to name a few), these have been offset by gasoline and clothing prices that have remained depressed. While this is certain to change in the coming months, the jury remains out on the extent to which inflation—and by extension interest rates—makes a comeback.
AN OBJECTIVE PERSPECTIVE ON THE CONSUMER PRICE COLLECTIVE
RECREATION & EDUCATION
SOURCE: STATISTICS CANADA DATA: JAN 2020 - JAN 2021 CHANGE IN THE CONSUMER PRICE INDEX BY CATEGORY, CANADA
SHOW ME THE MONEY There is an expectation that prices will soon rise rapidly; they may, but we’re one year into the pandemic and they haven’t yet. ›
credit and debt
03. credit & debt Concerns about mounting federal debt have taken a back seat to supporting Canadians financially through the pandemic.
HEY, BIG SPENDER
There is no way to sugar-coat it: Canada’s federal government has racked up an historic amount of debt over the past 9 months, to the tune of almost $250 billion. To put this into context, the cumulative deficits from the 132 months preceding April 2020 totalled only $204.2 billion. Under normal circumstances this would be deemed totally unacceptable; profligate; irresponsible. It might even make Shirley Bassey blush. But these are far from normal circumstances. With employment nationally falling by close to 20% in the months after the pandemic hit, it became very clear very quickly that drastic action was needed to stave off a recession that would have deep and long-lasting consequences for households and businesses.
Canada is not alone in taking dramatic steps to underwrite the economy, with most industrialized nations doing the same. With interest rates expected to remain very low for the foreseeable future, economists tend to agree that while federal debt has been accumulating in ways previously thought unimaginable for a non-wartime period, the burden of servicing the additional debt will remain blunted. Let’s hope so. If it doesn’t, we’ll find that debt repayments will squeeze out necessary spending in other parts of the economy. With most other countries adopting a similar philosophy on fiscal support and debt accumulation during Covid-19, we wouldn’t be alone.
credit and debt
SUPPORTING AN ECONOMY DURING A PANDEMIC AIN’T CHEAP
$204.2B PREVIOUS MONTHS
SOURCE: CENTRAL GOVERNMENT OPERATIONS, STATISTICS CANADA DATA: MONTHLY BUDGETARY BALANCE (BILLIONS $), CANADA
credit and debt
THE RAINY DAY DOESN’T STAND A CHANCE Never before have Canadian households saved money at the rate they currently are. The benefits will be reaped as the economy re-opens.
Some people seem to be reluctant to refer to the recent historic accumulation in Canadian household savings as, well, savings, but saving is what Canadian households have done for the past three quarters. Call it what you like—an inability to spend money, a fear of what the next rainy day might look like—but since the end of March, Canadian households have socked away upwards of $200 billion, including more than $90 billion in Q2 2020 alone.
When the economy fully re-opens, this money is likely to be deployed across all sectors, especially in travel, accommodation, and food and beverage. Real estate has already likely been impacted by these accumulated savings and will likely continue to be impacted by them for years to come. As our current red-hot market cools through 2021, this is one factor (along with increased immigration and still-low interest rates) that will help secure a soft landing.
READY TO SPEND, HOUSEHOLDS EYE THE END (OF THE PANDEMIC)
$196.9B QQ HOUSEHOLD SAVINGS
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
SOURCE: FINANCIAL FLOW ACCOUNTS, STATISTICS CANADA DATA: QUARTERLY HOUSEHOLD NET SAVINGS (BILLIONS $), CANADA
credit and debt
LOW RATES & PRINCIPAL-ED PAYMENTS First-time home buyers and refinancers are clearly benefiting from low interest rates, with less of each mortgage payment going to interest.
Until recently, a new homeowner would have had to pay down their mortgage for many years before they would be in a situation where more than half of their mortgage payments went to principal. For today’s borrowers and refinancers, the future is now. Like, it’s really now. For a mortgage with a 25-year amortization period (the length of time over which the mortgage is paid back to the lender), an interest rate of 2.78% represents an inflection point in borrowing costs, with the first mortgage
payment comprising a 50-50 split between interest and principal. At today’s discounted rate—which recently bottomed out at 1.39% (and acknowledging that, of course, this rate wouldn’t be available to everyone)—only 29% of the first mortgage payment would go towards interest, meaning 71%, or almost three-quarters, of that first payment would go right into equity. This is a boon for today’s borrowers, and it reinforces the financial benefit that can be associated with home ownership.
BORROWERS BENEFITED BY BARE-BONES INTEREST INSTALLMENTS
Dec 2007 = 5.89%
Jan 2020 = 2.49%
Feb 2021 = 1.39%
10% 20% 30% 40% 50% 60% 70% 80%
SHARE OF MONTHLY MORTGAGE PAYMENT GOING TO INTEREST
SOURCE: RATE HUB, RENNIE INTELLIGENCE DATA: FIVE-YEAR FIXED DISCOUNTED MORTGAGE RATES
credit and debt
NO, ARREARS, WE’RE IN THE CLEAR (WE THINK)
Despite what could have been a most turbulent time for housing in Canada, arrears rates remain near historical lows.
When the pandemic hit Canada in earnest in March 2020, one of the big fears that occupied the minds of policy-makers, banks, and homeowners was the possibility of mass mortgage defaults, should the economic downturn persist in the absence of adequate government support. This was a justifiable fear given both the evolving circumstances and the experience of the previous economic downturn, the Great Recession of 2008/9. Fortunately, household subsidies were complemented by a mortgage deferral program offered by Canada’s big banks,
which essentially allowed for the suspension of mortgage payments for a period of up to 6 months for in-need households. In hindsight, this program likely played a key role in stabilizing the ownership market. Nevertheless, arrears rates across Canada did rise through 2020; notably, however, the increases were minimal overall, with BC’s most recent arrears rate sitting at only 0.15% (Canada was at 0.22%). With the mortgage deferral program now all but wound down, arrears rates are likely to stabilize at their currently low levels. What a relief.
AFTER YEARS OF DECLINES, THE ARREARS RATE CLIMBS
DATA: YEAR-OVER-YEAR PERCENTAGE-POINT CHANGE IN THE MORTGAGE ARREARS RATE
SOURCE: CANADIAN BANKERS’ ASSOCIATION
credit and debt
ARREARS FEARS? Not surprisingly, some households struggled to make their mortgage payments during the pandemic. This isn’t likely to last. ›
A historically slow year for population growth in British Columbia in 2020masked hints of a return to more robust growth in the near-term.
GROWTH SLOWDOWN UNPLANNED IN LOTUSLAND
From a Canadian demographic perspective, the year 2020 will be remembered as the one where international migration hit a wall. With a national immigration target initially set at 341,000 for 2020, the fact that Canada only welcomed 184,000 immigrants has had—and will have—a number of impacts here in BC and in Metro Vancouver. British Columbia’s population only grew by 21,500 in 2020, with its 0.4% annual rate of growth the slowest since 1874; in Metro Vancouver, 2020’s population growth was essentially half of what it was in 2019. With 66% of external migrants and 73% of domestic migrants to the region renting within their first five years of arriving, the slowdown in migration has had a significant impact on the regional rental market, as evidenced by the
purpose-built rental vacancy rate rising from 1.1% in 2019 to 2.6% in 2020—its highest level since 1999. Of some note is the relative resilience of migration to BC in Q4 2020, with the 3,440 international migrants and 4,878 domestic migrants to the province exceeding last year’s Q4 totals by 4% and 136%, respectively. This is a good thing, too, given that we experienced 1,064 more deaths than births in Q4 2020—the largest deficit since data were first collected, going back to Q1 1946. Expect the greenshoots of migration momentum that appeared in Q4 to more fully bloom through the balance of 2021, with a future return to more substantial population growth in BC underscoring our continuing need for an adequate supply of housing.
IN 2020'S Q4, BC'S POPULATION GROWTH ISN'T LESS—IT'S MORE
POPULATION CHANGE NATURAL INCREASE
NET INTERPROVINCIAL MIGRATION
NET INTL MIGRATION
SOURCE: QUARTERLY DEMOGRAPHIC STATISTICS, STATISTICS CANADA DATA: TOTAL POPULATION AND COMPONENTS OF POPULATION CHANGE, QUARTERLY
THE DOWNTURN IN IMMIGRATION IN 2020 WILL BE TRANSITORY
The gap in migration to Metro Vancouver in 2020 may provide some housing demand relief in the short-term, but our economy needs them more than ever.
In addition to immigration boosting our labour force and supporting economic growth, it adds to our diversity as a country, as a province, and as a region. It brings with it new perspectives, greater tolerance and understanding, and new ways of exciting our five senses. Too bad then that 2020 played out the way it did demographically. Immigraiton to Metro Vancouver was greatly reduced in 2020: though we welcomed as many immigrants to this region as Alberta did to its entire province, our most recent immigraiton inflow was 43% below 2019’s and 30% below the average from the past five years.
Naturally, this has had differential impacts within the region, with the cities of Vancouver and Surrey—the two largest destinations for immigrants in the region, accounting for 71% of Metro Vancouver immigration over the past five years—seeing a 44% and 49% reduction, respectively, in the number of new immigrants in 2020. The rest of the region saw immigration fall by 38% between 2019 and 2020. This may provide some relief for the housing market in the short-term—bring some balance to the rental market and reducing ownership demand relative to supply, at the margin— but the longer-run benefits of normalized immigration flows will far outweigh any near-term relief.
VANCOUVER AND SURREY COULD SEE AN IMMIGRANT FLURRY
2,390 1,785 4,175
REST OF METRO VANCOUVER
SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: MONTHLY PERMANENT RESIDENT ADMISSIONS BY INTENDED DESTINATION CITY IN METRO VANCOUVER
MISSING OUR MIGRANTS
The youthful profile of movers to Metro Vancouver is a boon to our labour force and a key driver to housing demand.
Contrary to the observations of some about the composition of people that take up residence in Metro Vancouver, migrants to this region are really quite young—not surprisingly, as moving is a feature most associated with younger people, not older ones (as we have shown in past editions of the rennie landscape). More specifically, the most typical immigrant to Metro Vancouver over the past five years is a 27-year-old, and this is the same for domestic migrants to the region as well. Furthermore, 59% of immigrants to this region are between
the ages of 20 and 39, with 53% of domestic in-migrants also in this age group. Conversely, only 23% of immigrants and 31% of domestic in-migrants are 40 years of age or older. This is an important feature of our migration flows, as they do not only add people to our communities, but they add people who are typically actively engaged in our labour market and who, often accompanied by their young families, are also engaged in our housing market. We look forward to their return in the years ahead.
MIGRANTS TO METRO VANCOUVER: THEY’RE YOUNG AND THEY’RE RESTLESS
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 AGE
SOURCE: DEMOGRAPHIC ESTIMATES COMPENDIUM, STATISTICS CANADA DATA: AVERAGE AGE DISTRIBUTION OF MIGRANTS TO METRO VANCOUVER BETWEEN 2014/15 AND 2018/19
BIG CONTRIBUTORS International and domestic migrants to Metro Vancouver are overwhelmingly young and play a significant role in our housing and labour markets. ›
After years of elevated levels of condo inventory, completed and unabsorbed inventory has dwindled—much to the chagrin of buyers.
The heady days of residential real estate across Canada generally, but most specifically here in Metro Vancouver, that prevailed back in 2016 could be described in many ways, with resale prices (particularly for detached homes) hitting all-time highs and sales count records being set month after month, to name a couple. Another way in which the buyer euphoria of that time played out was in whittling down the number of completed and unabsorbed (unsold) condos in the region. For example, while there were approximately 2,000 new, unsold condos available to buyers at any given time in each year between 2011 and 2014, that number fell to 1,525 in 2015 and further to 806 in 2016. By 2017 there were only 283 completed and unabsorbed condos across all of Metro NOT CHOCKABLOCK WITH CONDO STOCK
Vancouver, before the number rose slightly to between 500 and 600 in 2019 and 2020. As of the beginning of 2021 there were fewer than 400 completed and unabsorbed condos regionally, which is 69% below the past-decade average. In the context of a resale market that is extremely tight (current resale inventory is 20% below the past-decade average while demand has soared to near all-time highs), this further reinforces the reality that there are limited options for buyers at the moment. With pre-sale inventory expected to rise through 2021 as numerous projects that had been slated to launch in prior years finally come to market, buyers might be wise to consider a less competitive path into ownership (or investment).
CONDOS COMPLETED, NOT SOLD: VERY FEW, ALL TOLD
69% BELOW PAST DECADE AVERAGE
VANCOUVER NEW WEST BURNABY
RICHMOND COQUITLAM REST OF REGION
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: INVENTORY OF COMPLETED BUT UNSOLD CONDOS
NOT THEIR FIRST RODEO (THEIR FIRST PANDEMIC, YES)
First-time home buyers remained active throughout 2020 and look poised to represent a continued demand driver in 2021.
With the resale market continuing to be defined by elevated demand, constrained supply, and recently soaring prices, one would be forgiven if they figured this was a bad recipe for first-time home buyers. Perhaps surprisingly, the data show that first-time home buyers have been ramping up their participation in Metro Vancouver’s real estate market along with existing buyers since midway through 2020. For example, through the first half of 2020, first-time home buyers throughout the region tallied 2,066 purchases, or 8% of the total number of transactions regionally during that period. In the second half, first-time home buyers accounted for 3,048 purchases, or 9% of all sales. In comparing the second-half of 2020 to the first-half, then, first-time home buyers purchases were up 47%.
Interestingly, the 2,066 in the first half of 2020 was only marginally more than the 2,055 from the same period in 2019; significant divergence was then seen between the years’ second-halves, with 2020’s 3,048 being 18% above 2019’s 2,589. What is behind this trend? Low interest rates, accumulated savings, the Bank of Mom& Dad, and government relief measures all likely have been playing a role, more or less. As we do with existing homeowners, we see first-time home buyer activity to slow in the coming months as interest rates rise (marginally) and pre-existing, built-up purchasing power becomes spent—but it seems clear that first-time home buyers will continue to help shape the market for some time to come.
FAR FROM DIRE: THE FIRST-TIME HOME BUYER MARKET MOVES HIGHER
MAR APR MAY JUN JUL AUG SEP OCT NOV : , : , 1% : , : , 18%
SOURCE: BC MINISTRY OF FINANCE DATA: NUMBER OF FIRST-TIME HOME BUYER TRANSACTIONS, METRO VANCOUVER
The pandemic resulted in fewer new projects coming to market as broad uncertainty reined. The supply-side impacts of this will be felt for years.
NEW SUPPLY RUNNING DRY? Robust housing demand seems to be hogging most of the headlines these days—especially in Metro Vancouver—but limited housing supply is also contributing to the rise in prices we’ve seen over the past year. Within the resale market, current home owners are reluctant to list their home knowing they will, in most cases, have to turn around and buy back into a highly-competitive market; furthermore, though the unemployment rate is high, continued government financial support and loose monetary policy has created affordable conditions for most owners.
Unfortunately, new supply doesn’t appear to be the knight in shining armour we might want it to be, with total housing starts in Metro Vancouver down 16% in the past 12 months versus the previous 12 months. This stands in contrast to the situation in Greater Montreal (starts are up 7%) and Greater Toronto (where they are up 31%). With job recovery continuing and migration set to reach new heights within the next year, true supply relief is likely to remain elusive.
METRO VANCOUVER’S NEW HOME CONSTRUCTION NEEDS A JUMP-START
HOUSING STARTS, PAST MONTHS
CHANGE VS. PREVIOUS MONTHS %
SOURCE: CANADA MORTGAGE & HOUSING CORPORATION DATA: TOTAL HOUSING STARTS
THIS TITLE IS CLEAR: HOUSING EQUITY WILL SUPPORT PRICES
The build-up of mortgage-free equity within the Metro Vancouver market is a latent source of future demand.
It can be useful to remind ourselves that while our rental market is mostly driven by incomes, our ownership market is driven by both incomes and equity. While “equity” as a concept is easy to understand, it can be challenging to measure, and thus it’s frequently left out of conversations about housing affordability. That’s too bad, because our estimates— based on the latest Census data describing mortgage-free households by age and the latest benchmark price changes—show that there is currently upwards of $373.3 billion
of clear-title equity in Metro Vancouver. To put this into context, this is equivalent to the cumulative dollar-volume of MLS transactions throughout Metro Vancouver between March 2012 and February 2021. Within this, baby boomers—those between the ages of 55 and 74, roughly-speaking— account for $205.1 billion in mortgage-free equity, or 55% of the regional total. Looking ahead, this equity will play a significant role in our market as it becomes unlocked over the next 20-plus years.
MORTGAGE-FREE SPENDING SPREE?
AGE OF HOUSEHOLD
EQUITY PER AGE GROUP
TOTAL MORTGAGEFREE EQUITY IN METRO VANCOUVER $373.3 Billion (total) +173% vs. 10 years earlier
SOURCE: 2016 CENSUS, STATISTICS CANADA; RENNIE INTELLIGENCE DATA: ESTIMATED VALUE OF MORTGAGE-FREE EQUITY BY AGE OF HOUSEHOLD HEAD IN METRO VANCOUVER
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