Macroeconomic Outlook & Regional Analysis for Real Estate Investors- Part 2 Q&A


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 of the Canadian housing market and for provincial economies.

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 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 so to see the charts Robert presented, go on over to our website, Sign in, it's free, and you can watch Robert's interview. So now let's go to the interview. This is part two of a special podcast with guest Robert Hogue, where you will hear questions and answers. To hear the main presentation. Listen to part 1.

Wow. Lots of information. So maybe we could talk all afternoon. This is such a big topic, right? It truly is. And I have some questions, specific questions that people actually wrote in and asked. So I'm gonna start with those and then we can have a conversation about that. So do you think, again, I know that nobody has a perfect crystal ball, right? What did we do?

Robert Hogue: Not even economists.

Laurel Simmons: Over time, do you think that house prices will be sustained as, particularly as you talked about immigration? Because a lot of people, especially investors, but everyone actually, they're worried about the crash of, we call the crash of housing prices real estate. If you're living in a home and you're there for 20 years or 25 years or 30 years, you really don't care.

You really, it's all evens out in the wash. But if you're an investor you might care because that's an asset that you want on the books and you don't wanna see it turn into a vast liability because your mortgage payments far outstrip the actual value of the house.

Robert Hogue: The question is, are we concerned ? Yes, we are. What I describe is a very strong fundamentals now. No low interest rate for a long time. Immigration eventually will come back. We'll provide this kind of demographic based kind of demand for housing.

Those strong fundamentals in my book don't justify 20 plus percent price increases. In some of the smaller and some markets, we're talking more than 30% year over year. This is a right now conditions that are altering price expectations, my economist calls it extrapolated expectations.

Now we just saw what happened over the last 12 months. And many people expect that this will continue to happen going forward. And this is creating this kind of sense of urgency, this sphere of missing out that a lot of buyers, I suspect, are rushing into, buying something before it's too late, before you know they can't afford and just did a report last week and looking back at last, just last six months.

Overall in Canada, prices have increased more than your benchmark prices increased more than a hundred thousand. So there's a lot of buyers out there that if we win another six months, this is gonna be way out of our price range or won't be able to buy because prices never fall.
We'll never be able to buy again, to buy to become owners. So our dream of home ownership is gonna be crushed. And a lot of that contributes to even faster rising prices. I think it's the kind of scent or psych market psychology right now is just not healthy. This is not this is not good.

If you want to call it a bubble by all means, I think it looks like one, smells like one . It probably is one. But obviously there are many kinds of questions related to that. I don't know if you wanna ask them or should I ask them myself, but really I think it begs a question about some kind of policy and intervention to cool things down.

We've seen an episode. Bubble episodes in 2016 and in BC and Vancouver Provincial government eventually intervened, put a housing plan essentially to put this amongst other things, put in slapped on a foreign buyer tax. 2017, the spring 2017, it was Ontario's turn. Similar conditions, prices raising most of southern Ontario, more than 30% provincial government, suite of 30 measures, including a foreign buyer tax.

There's a pattern there. I think policy makers have demonstrated a limited tolerance for bubbles this time because it's so widespread. It might not be, the intervention might not be at the provincial level or local level. It might be more at the national level. What can be done is still a work in progress as far as I'm concerned, but I think the odds of some kind of policy intervention has risen tremendously.

Second is if nothing gets done and if this, those prices continue to spiral upwards at some point, something's gonna give and then, we're not talking our base case right now is more a soft landing. Eventually, probably prices. In our view, are not just sustainable, they might not just come crashing down all at once.

That was true, at least when we did our forecast back in January. Now we might be considering a harder landing a lot more in terms of a base case scenario, but that's still what could be the trigger? It's probably higher interest rates, and that's probably more of that 2022 story, maybe the second half. All this to say that there are some, the current market conditions are problematic.

Laurel Simmons: One of the people asked, and I too I, we've all seen this in the news lately that how New Zealand implemented a 40% down payment requirement for investment properties. That's a pretty radical way to make it, yet they did it. And do you see something like that happening here?

Robert Hogue: I would not exclude it. I would not, I'm not sure if I would necessarily be the one advocating for them, but there are other aspects of the New Zealand package that I find interesting.

The thing to keep in mind is that in New Zealand at least the evidence is pretty overwhelming that investors play a large role in their own version of housing or overheating or bubble, whatever you want, however you want to call it. Whereas here, I'm sure there's a, like investors do play a role to a certain extent.

I'm entirely sure if that's the main force, if you were to tackle investors, if that would necessarily address the issue. But it could be certainly something that policy makers will be considering from politics. If you think, if you're putting your politician's hat here, it's probably a line of action that's probably less risky politically speaking than, targeting first time home buyers.

Tightening mortgage lending rules for first time homes and that kind stuff, especially in the federal context within an election being rumored and, in a few months from now, I think, Less likely, however, using a hammer to, to hit the investors. I think it might be the path of least resistance.

Laurel Simmons: I want to go back to one of the things you mentioned about, the sort of the outlying areas. Cause one of those graphs you or some of those graphs you showed so the smaller towns and cities where they have massive annual growth, like I'm in the Niagara region. And I on the lake and I'm looking at prices that I'm just, are you outta your mind like, I wouldn't buy

I'm saying something, you have to pay me to buy that house. But I know people who are like putting, buying for oh God, tens if not hundreds of thousand dollars over asking and which is inflating prices. But at the same time, we're seeing this huge influx of people from the more dense population standards like Toronto, like Montreal, like Vancouver, spreading out into the areas. So that too is driving prices up, right? because, there's only so much supply.

Robert Hogue: That's true too. And ultimately, there's something, if we go back to the pre, pre covid Policy discussion or main topic was we need to focus really on the supply side. We need more supply out. It's clear, especially in the context of the Canadian context where no immigration is really strong. And we were having just before Covid Canada's population was growing 1.4%, so that's something we had not seen in 30 years.

Very strong population grows, so fundamentally your housing stock needs to expand, and this is where the issue has been. The demand has been growing for demographic reasons, because no interest rates were low, probably not as low as they are today, but the supply side is not able to adjust quickly enough. For those of you who've taken economics 101 courses, now when you got strong, demand supply is relatively fixed.

The adjustment mechanism here is priced. So the longer term solution, which still remains the case here, is to focus on the supply side, address issues that are in the way of builders to respond quickly. The length of approval process, for example, in the cost of, development charges and everything that really all contribute to affordability issues.

That's fundamentally, but right now supply side measures would take too long to address the issue. Now I think it makes sense from a policy perspective, to use the main site type of tools here.

Laurel Simmons: At the same time you mentioned the immigration policy and the fact that we're not right now, but as soon as the gates are opened and we have all these people coming in, that's gonna put more pressure on housing.

There's not enough supply right now we know from SATs County reports, and, called you what, five years, six years ago that Toronto was getting, what, 10,000 new people. That was insane. That was more than the state of California or New York City because Canada's a really an attractive destination for permanent residents and immigrants. So do you have any indication as to how we can handle that. I guess it has to be long.

Robert Hogue: That being said, it's, I don't want here to imply that there's been no supplier response. There's very strong construction right now. It's just that it hasn't been quickly, it hasn't reached the end of the pipeline quickly enough to meet the man that's right there in the field.
To its credit in Ontario, for example, the provincial government has focused on the supply side and looking at various ways to make the production of new housing quicker. And I'm not quite sure if they've been that success making less expensive, but certainly, to expedite the system. So there is a supplier response, but there's still need, need for more.

Laurel Simmons: I wanna ask you a question about jobs just because jobs is such a fundamental sector. It just is everywhere and jobs drive our economy. The more people who have jobs, the more money there is in the economy, the more people spend and can buy things and houses and all the rest of it. You touched on that in your presentation about the fact that savings are going up, But that in the lower the service industry and the lower paid people the jobs have really fallen off. As we recover from this pandemic more jobs presumably will be created in those sectors. We're starting to see that now, I think.

Robert Hogue: It's actually, that's probably the missing chunk here. Now when I was showing the employment that picked up, there's like a 20% still, we're still down 20% relative to, in terms of employment relative. And that's largely, I think of that 80%, about the 20% missing. There's about 80% that are in the hospitality restaurant, airline travel and all that. Tourism, for example. And those can only come back once we reopen and people feel comfortable enough to be out there and travel around the country.

Laurel Simmons: Here's hoping right? That the vaccines really get out there and nobody knows for sure what's gonna happen. And we can only do what we can do. But I was really interested to see two of your stats about the savings. Cause we'd all heard that Canadians were savings for I didn't, I hadn't realized it was that much.
That's can you imagine five years ago how happy the feds would've been and everyone would've been if they'd seen all those savings in bank accounts. But it's gonna go somewhere, right?

Robert Hogue: Yes, that saving we all know where that savings went. Housing and the stock market.

Laurel Simmons: Yes, I think too, that I keep hearing about the Roaring twenties. I don't know about you, and I think you've alluded to that, but this is, I keep hearing this over and over again about the roaring twenties that we really could be heading into that kind of you wanna call it economy or lifestyle or whatever it is. How much of an effect do you think that will have on the economy or in general in terms of inflation? Whatever's going on cause we haven't talked about it.

Robert Hogue: We're all hoping we'll get some kind of roaring now but hopefully not over exuberance. And this is where the risk might be. We're seeing right now in, in the housing market some form of over exuberance. Like people are just, Going too far. And more broadly this overexuberance could lead eventually to sustain higher inflation for a period of time. And what this would be damaging in the sense that this is what central banks are afraid of.

Temporary blips in inflation is not a big deal. The bank account has been quite clear that it does expect inflation to pick up over the coming months. It's largely what we call a base effect is just when you compare to when you do a year over year percentage change, you gotta look at the year before the cost of a basket for consumers had dropped quite a bit largely that it's a gasoline price story here.

In the coming months, we're gonna see a little bit of a, let's call it a flare up in inflation. It's gonna pick up a bit, but what the Bank of Canada and other no central banks really care about is inflation expectation. Does that mean if inflation goes up to 3%, does that mean that on a go forward basis everybody will be expecting 3% inflation?

Right now the answer. No, probably not. Inflation expectations have been incredibly well incurred around 2% for decades now, and the Bank of Canada doesn't see any change. Now, would a Roaring twenties kind of change that? This could potentially be risky if people become overly exuberant and are willing to pay whatever price because they feel whatever.

Laurel Simmons: You're saying it's not a big risk right now. I remember the days of big high inflation and there's a certain demographic of us who do remember those days.

Robert Hogue: You also remember what it took. to get inflation down to 2%. Yeah. And which is, what is the painful part. And this is what we have to keep in mind with respect to monetary policy because what it took was effectively, the Bank of Canada would probably not entirely agree with that, but really the early nineties recession in Canada was largely driven.

Because the Bank of Canada was adamant to kill well to reign inflation expectations, so it ran interest rates higher, longer than it needed to get the economy back on track because it wanted to reign inflation expectations around what the target and the experience has been so painful.
Ever since that 2% has been tattooed on everyone's brain. That this is the normal rate of inflation. This is what the big Bank of Canada is setting its policy or that its target and it will do whatever it takes to keep it that way on a, on a trend basis.

Laurel Simmons: In other words, we have to keep an eye out and the ear open for what the Bank of Canada, their rates are, and then how they're managing it. Cause if they're trying to keep it that steady 2%, if it goes down. Okay, so here's a question. We got inflation roughly at take 2 and 1/2% and half percent, whatever. If it goes down and it could I guess. What does that mean?

Robert Hogue: Last 12 months has been down and then even failed below 1%.

Laurel Simmons: I guess that means people aren't spending, they're not buying, they're not spending, except for the things that they, especially in the real estate investing area. Like when you're trying to buy products, for example, you wanna renovate a house. The price of two, by far, has skyrocketed, right?

Like it's just skyrocketed again, it's supplying demand. The mills were shut down. A lot of people are doing renovations in their houses because they're not traveling, so they're spending money on that. But we do see even I guess price increases, but I guess when you average it all out truly doesn't make much.

Robert Hogue: That's something to keep in mind. There's no denying that there are some price pressures in certain parts of the economy. This is clear. You mentioned lumber, but I can give you a whole list of not metals and as well, there's no costs rising in certain parts of the economy, that's for sure.

At the same time, if, think of airline tickets and other parts on the, especially on the services side, which is the biggest chunk of the economy, by the way, anyway. And when you look at your basket of goods and services that you consume every month, services are a big chunk of it.
Those who have not are not under the same kind of pressure at. And so the Bank of Canada, when it sets its policy, actually looks at the larger equation here, not just home prices are rising or the lumber is increasing. Our copper is doubled in price, or whatever it is. It looks at the broader picture.

Laurel Simmons: As they have to I am going to leave it at that. I really thank you. This was a great conversation. I could just sit here and talk to y'all afternoon, but , we all have other things to do but we really do thank you, Robert. It was really wonderful. And again, we will display the links where people can get the reports and get onto the RBC and grab all kinds of great things. So thank you very much and we hope to see you again.

Robert Hogue: Okay. It's been my pleasure. That was fun. Thank you.

Laurel Simmons: Okay. Bye. 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.