How Deep and How Long, asks Altus Group

Amid COVID-19, Altus Group Forecasts Potential Effects on Economy and Housing Starts

As recently as a few weeks ago, Canada was well‐positioned for housing starts to at least match, and possibly exceed, 2019 levels both this year and next. Exceptional growth in both population and jobs last year, alongside lower mortgage interest rates, declining competition from the resale sector (as inventories were whittled down as sales improved) as well as the easing of trade tensions and the imminent (now realized) Canadian ratification of the USMCA, all pointed to a slightly stronger starts performance than we had outlined in our forecast last fall.

That, of course, was before the economic shocks brought about by the double whammy of COVID‐19 and plunging oil prices. As we go to press, the depth and duration of the economic disruption remain very uncertain. The major forecasters in Canada are starting to sharply reduce their outlooks for the economy, with the consensus view that seems to be emerging as of mid March (but literally changing on a daily basis) being a technical recession, with some recovery in late Fall but essentially no growth in real GDP for the year as a whole.

For housing, there is a potential buffer. Short term interest rates have been cut, with the Bank of Canada chopping the target for the overnight rate by a cumulative full percentage point in one scheduled and one “emergency” cut in less than 10 days. This has caused a drop in variable mortgage rates of about 70 basis points on average in the past two weeks (for a five-year term). But the stimulus from rate cuts may not be as significant as some analysts are suggesting, given that five-year fixed mortgage rates were and still are more favourable on average than variable rate mortgages, and rates for five-year fixed mortgages have only moved down about 10 basis points on average over the past two weeks (based on the “special rate” offered by the major banks). Our initial analysis is that larger declines in mortgage rates would be needed to help offset the current economic shocks on housing starts.

Are there any lessons to be learned for the housing sector from the SARS era? During 2003, the prime SARS year in Canada (with the onset similar to COVID‐19 i.e. mid winter), housing starts recorded their best year in 15 years, even though economic growth faltered. Many observers appear to be expecting a similar situation in 2020 – many forecasters who recently slashed their outlooks for economic growth are still expecting housing starts in Canada to remain above 200,000 this year. We believe the situation, however, is not the same this time around. SARS was a very localized situation in Canada, primarily concentrated in Toronto, and with far less impacts to the broader economy. Moreover, housing starts had just started to ramp up, after a very slow decade in the 1990s.

So, what might we see for Canadian housing starts this year and next? The current turmoil makes it too early to provide “best estimates” but we have prepared a few initial “what if” scenarios:

  • Pre‐pandemic base case. This is the outlook our Economics team had finalized two weeks ago (before COVID‐19 cases started to ramp up outside of China and the situation was declared a pandemic by the World Health Organization) but had not yet been released. While outdated, we felt it was important to include, alongside this special report, our full “pre‐pandemic” outlook. While we recognize that the world has quickly changed, we feel it is important for our readers to understand that the solid fundamentals had put the housing sector on very solid ground before the recent shocks. In other words, the housing sector went into the current environment in as good a position as possible to be able to post a quick recovery once everyday life goes back to normal.
  • Scenario A: Minimal demand and supply disruption. This scenario acknowledges that housing starts in 2020 would, other things being equal, largely reflect sales – “demand” ‐ that has already occurred, given the limited extent of speculative building and inherent sales to start lags. But it also assumes that the construction industry is only slightly impacted by labour and/or material shortages or full site shutdowns.
  • Scenario B: Moderate demand and supply disruption. This scenario assumes starts activity is impacted more significantly in 2020, but quickly recovers in 2021. It would be like the degree of short‐term downward adjustment during the recession of the early 1990s, but with a quicker comeback.
  • Scenario C: More prolonged demand and supply disruption. This scenario assumes more serious supply constraints in 2020, and more prolonged demand impacts. It would be more in line with the degree of adjustment during the global financial crisis in the latter 2000s.
  • Scenario D: Uncharted territory. No explanation necessary.

Patricia Arsenault is Editor of the Altus Group Housing Report

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