Macroeconomic Outlook & Regional Analysis for Real Estate Investors - Part 1


Laurel Simmons: Welcome to the REITE Club Podcast, Real Estate Investing in Canada. I'm Laurel Simmons and you're listening to a special interview with Robert Hogue. Robert is a member of the Macroeconomic and Regional Analysis Group with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for provincial economists. His publications include housing trends and affordability, provincial Outlook and provincial budget commentaries.

In his functions. He's frequently called to comment on the economy, both internally with us within RBC and externally with clients and the media. I could have talked with Robert for hours. He shares so much incredible information. I hope you enjoy listening to this interview as much as I did participating in it.

To see the charts Robert presented, go on over to our website, Sign in, it's free, and you can watch Robert's interview. And while you're there, poke around. We've updated the website and we have wonderful things for you to discover. So now let's go to the interview. This is part one of a special podcast with guest Robert Hogue.

This is the main presentation to hear the questions and answer session. Listen to part two. Hi everyone. I am really pleased to introduce Robert Hogue, senior economist with RBC. Robert was going to be speaking at our event tomorrow night cause I'm recording it the day before our event that you're watching now.

Because of the provincial budget he was unavailable, but he was kindly offered and we took him off on that offer. It's kindly offered to give us a presentation now and we've got lots of questions. We've sent some questions to Robert. That came in from the members of our community.
Thank you very much for doing that and Robert really looking forward to this. This is gonna be fun. I know you've got some great information to share for us, so I'm gonna hand it over to you.

Robert Hogue: Thanks Laurel. It's lots of questions. I would've had lots of questions to ask you as well because these days, there's a lot going on in the real estate space. A lot of questions, a lot of I would argue worries. I forget how many times I've been asked.

Now, are we gonna see a government step in and start cooling the housing market? And, it's definitely an option. And increasingly we think of an option that governments should take on. We are a very, I would say maybe Weir Junction who would've thought just 10 months ago that we would be now still in the pandemic, still with high unemployment across Canada, talking about an overheated housing market and let's call it a housing bubble, and not just in Toronto or Vancouver.

Now we're seeing signs of overheating and in many parts across the country. So I just wanna walk you before we go into the Q and A, walk you through a little bit of our thinking on the market, the economic kind of landscape. That has led to where we are today. And a little bit as well on our thinking where things are going for the housing market in particular.

I can broaden maybe in a Q and A talk a bit more in the other parts of the real estate space. Because there's a lot of contrast depending on which part of commercial real estate, for example. What we're talking about here.

Let me just start in my PowerPoint here because I just want to illustrate my talk here with some slides. Right now I would say over the last, I would say several weeks we've become. A lot more optimistic about the iconic prospect, about the outlook for Canada's economy and pretty much right across, across the board here from coast to coast.

The main reason is that economic growth has been a little stronger than we expected in the late stages of 2020 and early stages of 2021. But also in a great progress we've seen in, handling the second wave and also those mass vaccination campaigns now are getting underway. Or now we've just up our economic outlook. Now we think that Canada's economic growth will exceed 6% this year which at phase value looks super strong, but really it's much more of a reflection of where we are. We were a year ago. In 2020, how deep the hole was last year. So it's a rebound.

In fact, for many parts of the country now, we're talking full recovery only by the late stages of this year at best. And in many cases in 2022. So really to put that in context, but really as it stands right now it is a race of vaccinations and also the spread of new variants that could throw us a curve ball here.

We're thinking in terms of risk. But so far our base case is that vaccinations are gonna win the day. A third wave will be contained. But now, then again, we're not only an economist here, I'm not an expert in public health here. This is going to maintain the recovery we've seen so far because keep in mind that this recession is as brutal as it was. That was concentrated really in a couple months last year and March and April.

By, late stages of May, we're starting to see the economy start to reopen to a certain extent. And we've seen employment starting to pick up so that we've been in the recovery mode since last summer. where there was a little bit of turbulence late last year, early this year because of the second wave.

Now we have some we've experienced some further lockdown measures. And in case of Quebec, for example, also, a curfew being imposed, but as now that the second wave seems to be under control and hopefully the third. remaining under control, now we expect this recovery to continue and why not see fairly significant rebound from last spring.

One, of course, when the economy reopened it allowed economic activity in certain sectors to to pick up again. But also it's the fact that as brutal as Economic shock was the response, a policy response has been as extraordinary.

Here, I'm not talking about a few billion here or there. I'm talking here in Canada of hundreds of billions of dollars worth of support that's been provided from all levels of government, but particularly the federal government that really moved the needle. And if you wanna put it in terms of the economy, in terms of JDP, like really moved the needle here.

Exceptional policy support. And in fact, in hindsight, when you look at the kind of transfers that were provided, the household they've been quite generous. No, I don't want to minimize here the hardship that many Canadians have felt through the pandemic and continuing as of now.
In aggregate the support, the financial support that was provided turned out to be quite generous. And even in some cases, the serve, for example, made some people even better off than they were pre pandemic. So very strong support is coming from the government also.

When you think of the economy, there's two main policy levers. There's a fiscal policy, which I just talked about, but there's also the monetary policy that is under the control of the Bank of Canada and cleared to the Bank of Canada from the get-go. Did all it could to set the stage for recovery.

Of course, monetary policy won't be able to stop covid from happening. But what it did though is that it let set the stage for once the economy reopens that it would provide oil, all the oil needed to get the engine running again. So that's what the Bank of Canada's done. Is that, well on many fronts, but one of the main things that it has done is cut interest rates effectively to in my book to zero it cut its policy rate the overnight rate to a quarter of 1%.

Not only that, it has pledged to keep it this low until, based on the last statements from the Bank of Canada. For a long time until the early stages of 2023. Now, the Bank of Canada might well change its mind between now and then and in fact we expect the Bank of Canada to start raising interest rates by the second half of next year.

Nonetheless, I think the point is a very low interest rate for a long period of time and especially at the short end of the yield curve. So the short-term interest rate, longer term interest rate. We've ac in fact, actually I already saw a little bit of a pickup in recent weeks. Our view is that long term interest rates. No long term bond yields are gonna continue to creep a little bit higher. We don't expect any spike on that front, so it should be manageable for the economy in the housing market more specifically. So a very strong policy response, fiscal policy, monetary policy.

Going all out. And what this has done is that it's contributed and quite surprisingly, has contributed to a spike in household savings. So those financial support ended up at the time when many Canadians were not able and still to this day, not able to spend it as freely as what they would do normally.

Think of it, all the sectors are still closed, restaurants and hospitality airlines. All the travel has been effectively stopped or greatly reduced. So what Canadians have done is that they've built up their savings quite dramatically. We've seen the savings rate reach, by far, record high in the second quarter of last year.

They've continued to, The savings continue to be very high since then, even though they've come down slightly. So strong buildup of savings, that really was also a factor to get the economy going and the housing market in particular. And the other, the fact has been that the covid 19 recession has been incredibly uneven.

It's been uneven on very, So many layers from a regional aspect, from an industrial aspect, but also from an income distribution aspect. It's been mostly Canadians at the lower end of the income scale who have been most affected initially, and I've seen the slowest. Recovery since last summer, whereas those at the higher end of the income scale, the initial shock was not quite as brutal. By now they're the employment level is back to pre covid levels.

If you think in terms of the impact on residential real estate, in terms of home ownership, it really is about those at the higher end of the income scale. Those have not been quite as effective. They've benefited from exceptionally low interest rates, plus they've built up quite a bit of savings, so it really Winds up all the stars to get the housing market going.

Those at the lower end of the income scale, they're more likely to be the renters. And we've seen that the rental market, especially in the large urban areas in Toronto, Montreal, Vancouver, to a certain extent, has been going through a rough patch. We've seen the vacancy rates rise and there 's demand has been part of the issue, but there's also been a big issue about the supply side.

We've seen a lot of rental supply come online a lot of this and when rental supplies moved on, the longer term rentals, and a lot of those units were previously in the short term rentals. Covid has been quite a bit damaging for that business. The Airbnb business, as well as in areas like Toronto. There's been some stricter regulation that kicked in last fall that pushed many short term rental operators putting their units into the longer term rental.

Always say that the covid at the end of the day, if you think of the housing market as stimulated. And heated up the ownership market very dramatically. But at the same time, it cools some of the rental markets for a period of time. In addition to the factors affecting rental in addition to slower immigration that we've seen, I'll come back to this in a few moments.

I've been building this up here but ultimately, now we're getting the results that in hindsight are, should not be that surprising. The housing market has boomed since last summer. Here I'm showing Ontario to illustrate what I'm saying. But it is true pretty much across the board in Canada.

Home, like the existing home market, has surged since last summer. We thought initially it might be just a flare up in the summer because we knew that pent-up demand had built through the spring. But it was clear by the fall that there was more than just pent-up demand here. It was fundamentally very strong.

The really interesting part here is that this is not just a big city phenomenon here. Now, this is not just Toronto or Vancouver, Montreal. This is, large parts of the country, smaller markets as well. Here I'm showing. The kind of activity increases that we've seen across smaller markets in Ontario, you can, I can come up with something similar and for many parts of Quebec and also parts of BC as well.

Clearly this is beyond just a big city development here. The very strong demand exacerbated an issue. Pre pandemic where supply was pretty low to begin with, and in fact, Early in 2020, my main message to many many people in the sector was, look, things are heating up.

We're just, there's just not enough supply. This can only point to prices rising, not only rising, but rising faster. And indeed through this pandemic supply has come down even more. So when you compare to, say, a longer term average supply levels, the inventories are exceptionally low in many parts of Canada, including Ontario and Quebec and BC as well and parts of Atlantic Canada.

Very low inventories, obvious. When you have strong low inventories, this is a recipe for prices to spike that clearly Sellers are in the driver's seats right now, pretty much across, across the country, even in markets that were struggling prior to the pandemic, like in Alberta, for example, and in other parts of the ferries.

Now it's pretty much a sars. all around. Pressures are more intense in central Canada, parts of Eastern Canada, BC but nonetheless pressures are building pretty much across the board. So what we're seeing now is that prices are not only, didn't skip a beat during really, and overall in through the pandemic.

They're now they've accelerated. The main exception is on the condo side. I would say a downtown condo. The segments. And it's largely a reflection of the rental market because as and there's a big chunk of the rent the condo stock goes towards or serves the rental business or sector.

That's maybe the only up until very recently at least the only exception now we're seeing interest in the condo downtown condo segments now having risen quite significantly since maybe about December, somewhere around there. In other words, ever since vaccination has begun in Canada and price pressure.

Reflecting what has been in terms of activity has been quite widespread. This is, again, this is not just Toronto or Vancouver or Montreal. This has a much larger base and in fact, it's the smaller markets. If you think of Barry, Ontario for example, BL Quebec, for example, or the smaller places like Mission BC this is where the price increases have been the strongest so far.

Very, and this is quite unusual and in fact to see so much How synchronized markets are at this point. Typically, housing markets are little bit of islands on their own. You can have Toronto overheating, but no issues in Montreal or Ottawa and elsewhere. But at this point, it is a very highly synchronized swing in the market. Now the big thing is this, this heating up of the market is taking place despite immigration. Having plummeted through the pandemic.

As I've mentioned earlier, this is not to say that dropping immigration had no effect on housing, it's just that it has at least not yet negatively impacted the ownership market. On the rental side for sure. We've seen what we believe that the drop in immigration contributed.
To the soft patch that we've experienced in some of the rental markets in Canada. But, immigration was to remain this low for, in a very, for an extended period of time. Eventually, at least in my guess we would see some kind of negative implications on the ownership side of things.

We need to continue to keep an eye on the federal government and have been quite adamant to make up for any losses in terms of the number of immigrants coming into, or permanent residents, I should say, coming into Canada. The plan is to get more than 1.2 million new permanent residents in Canada this year, and over the next year.

We are very skeptical of the ability of the Canadian government to hit the target for this year, but certainly over the next couple of years now, assuming the pandemic comes under control, we'll be able to reopen. Our borders, and then the immigration wheel will start to turn not only normally, but because Canada's increased its immigration targets for this year.

In the next two, are immigration's gonna be even hotter than we have pre pandemic. So that's something to keep in mind going forward. It is an element of risk both on the upside and on the downside, depending on how quickly immigration is gonna pick up. I'm gonna leave it there, oh, and yeah, I think I'm gonna skip those immigration tend to go to the large urban areas. So obviously this immigration story is much more of a story for Toronto, Montreal and the Vancouver or lower mainland in BC. Whereas the movement of people within the same province tends to be.

More of an impact or an effect on some of those smaller markets in the periphery of the larger market. I think I'm gonna leave it here just to be mindful of leaving enough time for Q and A. Just quickly, a little bit of a sales pitch here. We've got a distribution list for our report.
We constantly report not just on housing, but anything about the economy. So I welcome, invite everyone to sign up for our distribution list and because I'm convinced those are, those analyses and commentaries that we put out will be of a great value to you. On this, I'm going to turn it back over to you, Laurel.

Laurel Simmons: Okay, thank you. So those distribution lists, like I can see the URLs up there on your screen And then Is that where people can go to get those reports or are they somewhere else?

Robert Hogue: You'll see, this is, you can go on those sites and then you'll be, you'll have the opportunity to click on join distribution. The distribution list. And then you'll just need to provide your email address.

Laurel Simmons: Okay. That's good. Thank you. I hope you've enjoyed this special podcast with guest Robert Hogue. We really appreciate it if you'd rate our podcast, because it does help us to reach other people who are interested in real estate investing. Thank you for listening, and as always, I want to remind you to come grow with us. Bye for now.