WHAT IS HAPPENING??
When looking at the market activity, and listening to the news reports, it's easy to throw our hands up in the air and say the markets are strange and we have no idea why they keep surging forward. We wanted to take a step back to try to understand why. With everything that has been going on in the world, what has changed. While there could be a variety of reasons for what is fueling the insurgency in sales, and we don't fully know how long it will last, here are a few thoughts to consider.
SAVINGS ARE THROUGH THE ROOF!!
To start, let's take a look at household saving. With less opportunities for consumer spending, there is a higher amount of saving that has been happening through the first half of 2020. According to Stats Canada, in the first quarter of 2020 Canadians saved 7.6% of their disposable income which is the highest level they have seen since 1996. This grew to 28.2% in the second quarter which was a huge spike, the highest savings rate since 1961! To put this into context, the average rate of saving over the past five years preceding Covid was 3%.
DEFERRALS, ARE THEY GOOD OR BAD?
Another aspect to household savings is tied to the mortgage deferral program that was put in place. A very real concern was that the widespread income loss during the Pandemic would cause significant challenges for households that are highly indebted, and whether or not they would be able to keep up with their payments. While many have compared the pandemic to recessions in the past, the Bank of Canada has found that there are more similarities to a natural disaster that has immediate and severe impacts that are much shorter lived than a recession. According to the Bank of Canada, the households that are indebted can cope with temporary income losses and continue to make mortgage payments for a median of 9.6 months. While the median seems to be quite high, they found that one in five homes could make two months payments using liquid assets while one third of households could make four months payments using liquid assets. Keeping this in mind and taking a look at the projected results for the mortgage deferral program, they estimate to have pushed back the peak so mortgages that go into arrears by 6 months, as well as significantly lower that rate as well. The simulation they did to estimate this went from the potential peak of mortgages in arrears hitting in November at a rate of 1.3% (an all time high) if nothing was done, to the peak hitting in May 2021 at a rate of 0.53% as a result of the mortgage deferrals.
MORTGAGES IN ARREARS ARE AT WHAT RATE??
This brings us to the discussion of what Mortgages in arrears typically looks like in Canada, and Alberta. The definition of arrears is three months without payments which would then lead to foreclosure proceedings. The Candadian Bankers Association has tracked these numbers through the decades, and as of April 2020, the percentage of mortgages in arrears in Canada was at 0.25%, and in Alberta was at 0.52%. If we look at Alberta specifically, these numbers have been rising since September of 2015 when it was at 0.27%. The mortgages in arrears in Alberta has never exceeded 1%, which was in the early '80's. This suggests to us that through recessions and hard times, the banking institutions prefer to work with people to help them keep their homes. The deferral program should contribute to keeping these numbers low.
IS THE BANK OF CANADA JUST PRINTING MONEY??
Next it is important to understand why interest rates are at a new all time low. In order to keep the financial system working well, our households and businesses have access to credit as our economy relies on credit. Here is a great resource that explains how the Bank of Canada has bought Canada Mortgage Bonds, commercial paper, bankers’ acceptances, corporate bonds, and federal and provincial government debt to help keep credit available for Canadian companies and households. They are using what is called settlement balances to purchase these, which act like loans from financial institutions to the Bank of Canada with an interest rate of 0.25%. As a result of these purchases, the financial markets can function properly to work with the Bank of Canada's record low interest rates to encourage spending and investment. This also will help companies borrow so they can invest in hiring or expanding business. All of this has also led to the record low mortgage rates which is helping fuel the Real Estate market.
RENTALS ON FIRE!
Another piece to this puzzle is the Rental market, and how that has become much more competitive in Alberta. For these numbers we will use the largest market in Calgary to give us an overview of what is happening. To look at other cities, feel free to use Rentfaster.ca for their stats. At the beginning of 2020, the average days on market for a rental was at 88 days, that has now dropped to 43 days which was 74 days at this time last year. The inventory has also been dropping, making it more difficult for renters to find properties.
THERE'S NO PLACE LIKE HOME!
It is also important to consider what appears to be a renewed appreciation for our homes. With the uncertainty in the world today, and people being forced to take a step out of our "busy" lives it has brought about a new appreciation for family time at home. This has also led to people making decisions about where they live and if it suits their needs. The opportunity for many to work from home has also opened up new opportunities for people to live outside of the larger City Centers. The uncertainty has also led people to assess their financial situation, and in some cases has forced people to "right size" their homes due to their own situations.
MOVIN' ON UP...
All of this has contributed to the property ladder taking full effect. With the rental markets tightening, the savings increasing, the interest rates being rock bottom, and the importance of home increasing, it has led first time buyers into the market. One of the biggest challenges in recent markets has been that most buyers in the markets also had a home to sell in order to be able to make a move up. With the first time buyers market moving, this has allowed for movement in other areas of the markets as well.
MOVIN' ON OUT...
The final piece to this is the people that have chosen to move out of Province as our Net Migration has been declining, and as of the end of the second quarter was down 1,836 across the Province.
WEATHERING THE STORM..
With all of that said, this can all change on a dime as anything can and has happened in Real Estate. With so much uncertainty all we can do is look at the facts in front of us and adapt and adjust as we move forward. One of the biggest factors to watch that will determine how quickly we fully recover is going to be the labour market. With unemployment improving each month as people get back to work, this will be a key indicator for us to watch closely.