Canadian Real Estate Prices Could Drop Up To 30%, Moody’s Advises Institutions | Better Dwelling

Canadian Real Estate Prices Could Drop Up To 30%, Moody’s Advises Institutions | Better Dwelling

One of the world’s largest risk advisory firms says Canadian real estate won’t be spared. Moody’s Analytics released their Canadian Q2 forecast, showing how COVID-19 will impact the Canadian economy. The firm advised their institutional clients that real estate will be impacted, with even an optimistic scenario showing price declines.

Risk Assumptions and Baselines

First, a quick note for non-analysts on the basics of assumptions and baselines. Analysts take a snapshot of environmental variables, and then create a baseline forecast. The baseline is a reasonable assumption of what would happen, if everything went as expected from today. From there, they have various impact scenarios that are based on any increase of risk.

The baseline used in the most recent GDP forecast assumes a quick reboot. Economic activity would return in early June, and the longer the lockdown lasts – the worse it gets. For instance, scenario 3 (S3) is if the economy fully reopens in July – just one month later than the baseline. In that time, the baseline annualized change to GDP goes from -15%, to -25% with the later reopening. So we should reopen the economy next week, right? Nope.

Both the government and the senior economist have warned re-opening too early is a bad idea. If re-opened too early, the virus’ second wave could be worse than the first – like Singapore is currently seeing. Re-opening too early would roll the whole containment back. That would prolong the lockdown, and create even greater economic risks.

Low Interest Rates Won’t Provide A Boost

Optimism around low interest rates is non-existent in this environment. Moody’s notes “reduced interest rates will not save the [Canadian] housing market.” Low rates are great for freeing up cashflow, and providing stimulus. Those are generally points that help more in recovery though. Interest rate cuts are generally bad signs, as people like the Globe’s Rob Carrick have been pointing out for weeks now.

The focus should be on the level of unemployment after government incentives expire. The firm notes employment is the single biggest factor for home prices. They also state there is some noise with initial unemployment claims. The unemployment rate should decline as the economy reopens. Temporary layoffs would return, helping to soften the impact. However, we won’t know what the natural, and efficient labour market looks like until year end.

Canadian Home Prices Expected To Drop Up To 30%

Canadian real estate prices are expected to drop in the baseline, and the declines get bigger as the lockdown persists. The S0 baseline shows prices decline 8% in real terms, with a return to breakeven one year later. In the S3 scenario, prices decline 20% in real terms, and recover in late 2024 or 2025. In the S4 forecast, prices fall over 30% well into 2022, and recover in real terms towards the end of the decade. Reconstructing their model with the same macros parliament is using, prices drop about 24%.

Canadian Home Price Declines Forecasted

The forecasted decline to home prices across Canada. Baseline scenarios S0 and S1 are similar, and unavoidable according to the forecast. Parliament reconstruction is created by reconstructing Moody’s model, and using the macro guidance forecast parliament has been given.

Source: Moody’s Analytics, Better Dwelling.

The government is most likely to try to extend market inefficiencies to prop up house prices. However, that would have a limited impact, and lead to a whole other set of problems. Instead, unemployment is the area people should be watching. Programs targeting the creation of real and sustainable employment will have the biggest impact.

Also worth a note is these scenarios deal with an unknown behavioral response. The assumption is once the real economy reopens, things return back to normal. However, as places like Wuhan have discovered, the psychological impact may be deeper and longer than people think. Despite the reopening of their economy, people are still avoiding things like eating out and shopping. People not spending in the economy leads to a much longer recovery period.

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This content was originally published here.

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