Three questions with BCREA Economist Brendon Ogmundson
The arrival of COVID-19 caused stock markets and oil prices to fall and unemployment rates to rise.
In response, the Bank of Canada significantly lowered the prime interest rate and our provincial and federal governments launched a series of relief programs to help those impacted.
Locally, COVID-19 caused home sale and listing activity in Metro Vancouver to initially slow to about one-third of the pace witnessed prior to the pandemic. REALTORS® were quick to adapt, converting most services, like open houses, to a virtual environment. While housing market activity is beginning to pick up, some commentators have suggested that COVID-19 could cause home prices to decline longer term.
To help us make sense of these developments, we asked the British Columbia Real Estate Association's Chief Economist Brendon Ogmundson a few questions. Here are his answers.
1. What long-term impact will COVID-19 have on our economy and housing market?
For the first time in over a decade, the BC economy is in a recession. But this recession is unprecedented in that it didn’t happen due to collective poor business decisions, rapidly rising interest rates, bad loans, or misadventures in financial engineering. Rather, the economy has been purposely halted for the greater good. The implication being that, the shorter the duration of this unusual period, the more likely it is that demand can more readily return to where it was pre-COVID-19 and the outsized employment losses experienced this year can be reversed.
The ultimate impact of COVID-19 will depend on how quickly economic activity can return to its pre-COVID-19 level. The speed of the recovery will depend on the level of comfort people feel in getting back to work, going to the store, or catching a movie with friends, a variable that’s ultimately unforecastable. As the economy “re-opens” and as the industry along with buyers and sellers adapt and innovate, we expect home sales will rebound, aided by record low mortgage rates and pent-up demand. While the way we do those things in a post-COVID world will certainly change, I’m optimistic the economy will bounce back strong in 2021, with the housing market leading the way.
2. What home price changes and other long-term trends do you expect to see?
The impact of the current pandemic and associated recession on home prices is largely determined by the reaction of supply. If the inventory of listings accumulates significantly, and particularly if that inventory represents foreclosures or motivated selling by those affected by rising unemployment, then prices will be more severely impacted.
However, given the unusual nature of COVID-19, the supply of listings for sale has declined for at least the first month of the pandemic. It’s likely that even as social distancing measures ease and normal recession dynamics take over, the total supply of homes for sale will peak at a lower level than would be expected given the underlying economic turmoil.
A muted rise in for-sale inventory along with plummeting interest rates and pent-up demand may translate to home prices remaining relatively firm in 2020. In fact, this is a scenario we often see during recessions. Look back on the 2008/2009 financial crisis and recession, truly a frenetic and frightening time. While benchmark home prices in Vancouver moderated slightly, by early 2009 they were rising once again, leading to a double-digit average increase over the next two years. While a repeat of the post-financial crisis prices growth isn’t our baseline forecast, it’s illustrative of how Vancouver home prices have fared, even under an otherwise extremely challenging economic climate.
3. What should Realtors do to adapt their business given today’s environment?
On this question, Realtors certainly don’t need the advice of an economist. The real estate sector has shown itself to be remarkably resilient in the face of this pandemic. In a relatively short period, Realtors have adapted to a complicated new environment while dealing with enormous uncertainty.
Whether through virtual tours or combinations of other high- and low-tech solutions, transactions continue to take place and Realtors continue to serve their clients while adhering to measures necessary to mitigate the spread of COVID-19. While activity is still far below where it would be normally, sales and listings do seem to be picking up quickly and I’m optimistic this trend will continue through the summer.