Updated: Jan 1, 2021
The hot topic that the whole world is talking about in Q1 2020 is Coronavirus disease (COVID-19). This pandemic has created turbulence in the markets around the world and has put a choke hold on the global supply chain. Thursday March 12, 2020 the Ministry of Education announced that all Ontario publicly funded schools are to remain closed from March 14 to April 5, 2020 in response to COVID-19. This is just one of many pre-cautions taken by many government, private, and public companies. For example, the NBA and NHL have cancelled their seasons until further notice. Many venues have been put on hold and most companies are requesting that their employees work from home. All this information has been extensively covered in social media.
The one topic that is not being covered is - what happens next? When we see a massive disruption in our economy the ripple effect can be quite damaging. When we decide to close down schools, we must also take into the consideration the impact it will have to the household(s) income. This will ultimately squeeze any disposable income and potentially put the household(s) at risk. Household disposable income reducing implies that certain businesses/industries will eventually suffer from solvency. Venues closing translates into unemployment rates increasing. In my opinion, we are currently in the middle of a recession. Before we jump there, we must look at the last economic meltdown. In 2009, DOW, Nasdaq, S&P 500, and TSX went down between 40-50%. On March 12, 2020 – a historic moment on Wall St – markets had the worst day since Oct. 19, 1987. The S&P 500 alone plummeted 7% just minutes after the markets opened. This triggering a 'circuit breaker' causing a halt in trading for 15 minutes. Although this is just a snapshot of one day’s performance, we must also consider where the markets are YTD in comparison to 2009. Overall, we are looking at 20-30% drop. This is quite significant but still only half of what we saw in 2009.
As business begin to pull back on spending, we will continue to see changes in the market. Unemployment will start to increase. This will cause consumer reliance on credit and put pressure on our banking system. One thing for us to watch as real estate investors is credit availability. We can expect that credit availability will be limited – like what we saw in US during the 2009 recession. The banks reduced/closed any available credit to limit spend. This can have a substantial impact on our ability to keep investing during a downturn market. In this situation, the ripple effect on real estate pricing will be last. We can expect prices to drop as our unemployment rates start to increase. Investors can take advantage of this downturn. Real Estate prices have been in hyperinflation mode since 2014 in Hamilton and across most of the GTHA. The graph above shows YoY growth (blue) and House Price Index (black). Take note of the dip in 2009 and the hyper growth between 2014 and 2018. If we look at historical growth, the current HPI should be closer to 210, which is 0.84 on the dollar. In 2009, we saw an 8% dip YoY. In Canada, we didn’t see a big impact to our real estate prices compared to what we saw across the border in US. In contrast, with COVID-19 pandemic, we should be prepared not only a for a correction from current HPI but also a plunge due to an economic downturn. The true impact will solely be based on the longevity of the pandemic.
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