Financial Outlook with Jean-Francois Perrault, Chief Economist Scotiabank

Following are the highlights from a telephone conversation with Jean-Francois Perrault, Chief Economist Scotiabank and John Webster, President and CEO Scotia Mortgage Corporation which took place on Thursday, April 9, 2020 at 4:30 p.m.

First, it’s not all bad news. While I’ll have to include some unpleasant information in order to provide a complete picture, that is not the focus.

We are in the early stages of a deep recession. A deep global recession.  How deep will it be? How long will it last? It all depends on the virus and how quickly we can get back to work.

A decline of 30% to 40% in economic activity in the second quarter is forecasted. This is a huge number; one we have not seen before. 

Although social distancing will continue, to some extent, well beyond the end of the second quarter, it is assumed that the lockdown will begin to unwind during the second half of the year. 

That’s the bad news… On the other hand, we will start to reverse this economic slowdown in the third quarter if we see a flattening of the pandemic curve. I personally believe we will see this happen.  

How does this affect the housing market? Fewer transactions are taking place at the moment as it becomes more difficult to visit homes. However, fundamentals remain strong for Canada’s housing market.

Population growth is at a 30 year high. Population growth over the past several years has been rising faster than the supply of homes, creating an imbalance in supply and demand thus generating a shortage of housing supply.  This suggests that we will come out of this with a healthy real estate market.

Interest rates will amplify this demand. Although interest rates have not come down as much as consumers would expect due to higher perceived risk resulting in higher costs to fund, this trend is expected to subside over the coming weeks and months.

As well, the Government of Canada has stepped in to help consumers and businesses weather the storm. Many businesses drew on their lines of credit to ensure they had available cash and access to cash. The Government of Canada has rolled out never before seen programs to lessen consumer concerns and to ensure there is no market collapse… both the stock market and the housing market…and it’s working!  Lessons were learned from the last financial crisis of 2008/09, with quicker and more decisive action taken. In fact, we may yet see more government programs and financial support offered in the coming days and weeks.  

With borders closed for the time being, including the US border, we could see a peculiar benefit as we experience more domestic travel and spending.  As well, with some part time employees getting paid more than what they received while working (many current employees do not fit this scenario for obvious reasons), we should not see excess depreciation or a housing bubble. 

KEY MESSAGES… and my interpretation of the current situation.

– Inflation is down making things more affordable.

– Mortgage rates have not come down as much as they should, but this will change over the coming days, weeks and months ahead.  Get a rate hold today, stay patient and speak with your mortgage broker to ensure you benefit from any downward rate movement.

– We saw the bank rate drop by 1.50%, and variable rate pricing went up by 1.00% providing a net benefit of 0.50%.

– We saw fixed rates drop by 0.80% but they have since come all the way back up. 

– Watch for rates to be cut back further as the Government of Canada stimulus programs begin to take effect.

– Stock markets dropped by 30% to 40% but have since recovered most of these losses.

– The Government of Canada projects a deficit of $170billion to $200billion this year,  compared with $57billion in 2009 when the last financial crisis hit. 

Note that economists are not overly concerned about this deficit as they feel it is manageable. Despite the obvious problems and issues at hand, a positive economic outlook is foreseen during the second half of the year. Take heart, this message is echoed by the experts! 

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Your best interest is my only interest.