2020 Canadian Market Wrap Up

January 2020

The Lower Mainland has endless supply and demand issues. The government has been doing what they have viewed as just to curtail the demand side and, unfortunately, little to improve the supply-side issues. That whole issue is an article on its own so I won't dive into it here but it's important to understand the Lower Mainland has a relatively consistent high demand for product as we are getting new people here every day and that is not holding up anytime soon.

The photo below shows a graph illustrating the benchmark price for both the Fraser Valley & Greater Vancouver over a 3 year period. 2019 felt like it was the year when the market was starting to become more balanced after the whirlwind of the previous 3 years and leading into 2020 I along with economists at the BCREA were optimistic this sentiment would continue allowing for a rare but balanced market for the Lower Mainland. My optimism was quite quickly halted as supply quickly became an issue in the first couple months of the year. 

By late February/early March things were starting to turn around and within 3 weeks the office was a ghost town which went on until early May. The real estate market was a scary place at this time. I remember having a client who had to sell their townhouse towards the end of March and it was not a fun time to be a listing broker. We ended up selling it for a good price but had no legs to stand on when it came to negotiating which made things tough. At the same time, I had a group of buyers who were now able to get incredible deals. The deals I did in March & April when sellers thought the world was ending are some of the best deals I have done in my career. People asked all 2020 whens the best time to buy and they were saddened to hear the best time to buy was when everyone was scared. Warren Buffet says it best, be fearful when others are greedy and greedy when others are fearful.

Why did the stock market perform so well

The price of a stock today is a reflection of a companies future earnings. If it is expected that a company will perform poorly in the future then that sentiment is reflected today byway of a pullback from the price range it was previously trading at whereas on the other hand, if a company is perceived to have positive future earnings then that stock should see an increase to its present value in the amount of the future earnings discounted to today's dollars.

Since April, earnings expectations for the following year, after crashing in the spring (Bad Q1 numbers), have been on a huge run with companies expecting a 20% increase in revenue compared to the slump of March 2020 so it could make sense to conclude that strong future earnings played a big part in the upswing. At the end of the day, I do believe this is the simplest answer as to why stocks go up but in this instance, one would be hard-pressed to say it was nothing else but that.

The major factor affecting the performance of the stock market this year was the massive stimulus from both the Canadian and American governments. If it wasn't for the stimulus then investor confidence in a stabilization of the economy would be shot due to the massive unemployment numbers. A lot of people have criticized the governments for this stimulus in various ways but there is no denying that trillions of dollars helped to bring the market back to life. Furthermore, with interest rates cut so low, it's viewed as the closest to free money we'll ever get so investors have been taking as much as they can get to go out and buy assets which at the end of the day is why the governments lower rates, to incentivize spending.

Why did the real estate market perform so well

Long story short - Supply & Demand

As I mentioned previously, real estate was not a popular topic for the months of March & April, however, after May long weekend it felt like COVID wasn't a thing for the real estate market anymore and ever since then it's been nuts. I'm not sure the exact reason but there are a couple of factors at play I'd say.

1. The stock market bottomed out March 20th, 2020 and started to rebound from there recouping almost half the losses incurred by May long. During this time, people were looking at the stock market for signs of economic strength as real estate is a lagging indicator so perhaps by then enough of the market decided the worst was behind us.

2. The first-rate cut to the overnight rate by the Bank of Canada was March 4th from 1.75% - 1.25%. This was followed by a rate cut from 1.25% - 0.75% on March 17th. 10 days later the rate dropped to 0.25%, the lowest it's ever been. Mortgage interest rates could be found sub 2% at this point which is viewed as the closest to free money you can get and that we might ever get, especially for those who remember the 20%+ days.

3. Pent up demand. The spring market is generally the busiest time of the year for sales as most people want to move in the summer, not the rainy winter we generally get. The 4th and 1st quarter is generally when investors will go about acquiring properties as there is less competition. 2020 didn't bring us our typical spring market however so a reason as to why there was so much demand from May onwards can also be linked to the pent up demand. At the same time, sellers weren't wanting to sell with the pandemic going on as it made it more of a challenge to accommodate showings and potentially unsafe for some.

4. The effect on wages. Looking at job growth by wage tier, high-income jobs are up 6% compared to pre-pandemic levels and middle-wage to lower-wage jobs are down 8 - 10%. Increased income coupled with low-interest rates explains why home prices are up 10%+ year-over-year in some markets while the harsh effect on lower-wage industries has resulted in the rental rates of Downtown Vancouver dropping 15% year-over-year.

5. FOMO. The fear of missing out is even applicable when it comes to buying the most expensive asset of an individual's life which is understandable as one month can potentially cost tens to hundreds of thousands of dollars in missed appreciation when the market is taking off like it is and has been.

The Detached & Attached Market - Differences

While the real estate market performed exceptionally well over the previous year, it wasn't the case for all housing types. The detached and townhouse market performed but the condo market had a rougher year.

A client of mine and I were out looking for a rooftop townhouse in a specific complex of Yorkson which is in the Willoughby neighbourhood of Langley, BC. The search started in August and at the time townhomes in this complex were trading for $515,000. Four more homes in the complex and two offers later both in multiple offers, by October that same townhouse was now $540,000 and they were officially priced out of the townhouse market. There were opportunities for them to outbid the other offers but they felt they were overpaying in the heat of the moment but in hindsight, it would've been a great price considering as of January 2021 that townhouse is now $550,000. Now that they were priced out of the townhouse market that meant we had to move to the condo market and what a change of scenery that was. The few places we looked at all had been on the market anywhere from a couple of weeks to a few months with no real offers yet so we had ample time to look around and compare which was a breath of fresh air for my clients. We looked at a few places before they relatively quickly settled on a new construction penthouse unit with sweeping Mount Baker views. By this time my clients were accustomed to multiple offers with short subject periods so it was quite a relief when we were able to send an offer asking for a $45,000 price reduction and eventually getting an accepted offer $30,000 off the asking price. The only reason we got such a smoking deal was due to the hit that the condo market took since COVID began.

The primary reason the condo market was hit so hard while the townhouse and the single-family market continued to perform is because the largest demographic affected by COVID was the tenant market. The Downtown Vancouver rental market suffered a 15% year-over-year decrease in rents due to the effects of Covid on the rental market which came in the form of lost employment for many and a halt on immigration to the area which also represents a large pool of the tenant market. Tenanted properties are primarily condos which lead investors to hold off on buying more condos. Furthermore, the stay-at-home orders resulted in lots of people realizing they want or need more space so those who were previously looking for condos started looking for townhomes if the budget permitted and those living in condos sought to take advantage of low rates and upsize to a townhouse. All of that combined resulted in more supply and less demand which is a recipe for good deals.

Commercial

The commercial market performed similarly to the residential market. Some asset classes performed well while others not so much. Industrial, multi-family and essential retail continued to be highly sought out property types as those asset classes are some of the most secure real estate holdings you can get due to their track record of performance during recessions. Other asset classes I would trust to perform through the majority of recessions are mobile home parks, storage facilities and offices depending on the tenant mix. With interest rates cut so low last year demand for commercial investment property was higher than we have seen in previous years and leading into 2021 there is no sign of this sentiment holding up. Non-essential retail such as restaurants, daycares, wedding stores, etc took a beating in 2020 which made for good negotiation positions for some, however, we generally try and steer clear of those asset types as we view commercial as a wealth creation tool, not a stress creation tool and risky tenants are one way to add more stress in your life unless you really know what you're doing.

The Market Moving Forward

Heading into 2021 things are starting to look up from a pandemic perspective and overall economic perspective as well. The vaccine was announced towards the end of the year and will continue to roll out through 2021 easing the minds of those who have been on higher alert since this all started almost a year ago which will hopefully lead to more supply.

Global rationality and confidence in global trade is starting to come back to the economy as president-elect Joe Biden will be taking office towards the end of this month. Love him or hate him there is no denying that Trump caused massive uncertainty when it came to global trade which has a profound effect on the financial market. Economically, the market views Joe Biden as a safer and more predictable president which has positive effects on the global economy and something we'll see play out through 2021.

Due to the lockdowns, savings rates have been going through the rough so there is potential for a consumption boom as there is currently about $75B over and above what is normally in people's savings accounts. As the lockdown continues to gradually ease off that money may come flooding into the market faster than normal consumption levels and could potentially lead to substantial growth in smaller markets as people adjust their lifestyle habits and expensive markets get more expensive.

Immigration will be coming back this year which will bring back the suppressed condo market. In December we were starting to get a hint that the condo market may be coming back already and that sentiment was confirmed when the stats for December came out. Sales-to-active ratios for condos in the Fraser Valley jumped from 38.3% to 57.7% month-over-month from November - December and from 25.7% to 37.9% for Greater Vancouver. Those active in the condo market are predominantly those who have been priced out of the townhouse market or sick of the competition for it and a small part of it is investors as this very well may be the bottom for the condo market. The rental market for condos will remain suppressed for the majority of this year in my opinion.

References

https://finance.yahoo.com/news/stock-market-chart-of-the-year-2020-morning-brief-105422800.html

https://www.nytimes.com/2020/01/16/business/stock-market-record.html