I have been fielding lots of emails today regarding the panic in financial markets, so I figured I would document some of my thoughts here today. In case you’re not up to speed, G7 finance ministers and central banks joined an emergency conference call Tuesday morning, reaffirming their commitment to act to protect their economies, but stopped short of any specific action. A few hours later, the Fed delivered an emergency rate cut of 50bps.
Despite the drastic measures, the stock market sank lower anyways. In a flight to safety, bond yields plummeted. As of this writing, The 10-year Treasury yield has officially sunk below 1% for the first time ever.
So what to expect here in Canada, particularly as it pertains to Real Estate?
The Bank of Canada will be cutting rates tomorrow, markets are assigning 100% odds of a 25bps cut from Poloz tomorrow. We could see as much as 50bps, with markets assigning nearly 70% odds.
This will obviously help over indebted Canadians, and could spur further activity in the real estate market. After all, the 5 year bond yield crashed to levels not seen since 2016. In other words, mortgage rates will likely test previous lows last seen in 2016. In fact, we now have HSBC offering a 3 year fixed insured mortgage rate of 1.99%.
However, what is unknown is whether or not this drop in mortgage rates will be offset via negative consumer sentiment emanating from the stock market and Coronavirus. So far the market looks resilient, with February home sales in Greater Vancouver up 45% year-over-year. But it is important to remember, real estate is a slow moving asset class. It does not have wild swings from week to week, or even month to month for that matter.
If the Coronavirus is as serious as some believe it to be, which obviously has some validity to it (why else would there be an emergency meeting between G7 policy makers) then its hard to see how this won’t result in a material economic slowdown.
This is important to note as the only thing that will derail the Canadian housing market is a self-fulfilling feedback loop of negative sentiment and/or job layoffs from an economic shock.
Furthermore, despite wild conspiracy theories, there is no flight to safety coming from China. This is not a repeat of 2016. The luxury housing market remains quiet. Activity remains robust in the low end- mid range market which relies on several factors: cheap mortgages, full employment, and confidence. Two of which will be put to the test.
I will be watching this closely.