Recession's on its way. How bad will it be?

New BCREA study attempts to contextualize the economic damage COVID-19 will have on the province's housing market

Recession's on its way. How bad will it be?

In its most recent Market Intelligence report, released yesterday, the British Columbia Real Estate Association shared its preliminary projections on how the historic economic disruption sparked by COVID-19 will play out in the provincial housing market for the next two years.

In Is It Different This Time, the BCREA attempts to contextualize the upcoming recession by examining the three recessions the province weathered in 1981-82, 1990-92 and 2008-09 and detailing how the housing market reacted in the years following each one’s conclusion.

If the comparisons can be trusted, the upcoming 2020-21 recession should be uncomfortable but hardly unbearable.

The 1981-82 recession was the worst ever recorded by the province. Unemployment climbed by nearly 10 points to 15.7% and the economy shrunk by 6.4%. But in the year after the recession began, MLS home sales increased by 31%. After the agonizingly long but less disruptive 1990-92 contraction, they leapt by 46%. Once the recession generated by the 2008 financial crisis passed, sales increased by 24%.

BCREA sees the Canadian economy shrinking by a modest 4% in the first quarter of 2020, but a more dizzying decline of 21% is expected in Q2. (On a non-annualized bases, that second quarter pullback is closer to 5%.) An overall “peak-to-trough” decline of 7% is projected for the country’s GDP, which places it well ahead of both 1981-82 and 2008-09, where national economic growth fell by 4.5% and 4.4%, respectively.

The report avoids any fortune telling when it comes to the provincial economy, but it does stress that the COVID-19 recession is unique in that it wasn’t caused by any underlying economic ills like irresponsible lending practices. “Rather,” the report goes on, “the economy has been purposely halted for the greater good. The implication being that, the shorter the duration of this unusual period, the more likely it is that demand can snap back to near where it was pre-COVID-19.”

In that best-case scenario, the BCREA expects home sales to fall by 30-40% year-over-year in April and remain at suppressed levels throughout the summer. But as social distancing measures are lifted, pent-up demand and low interest rates are expected to bring buyers stampeding back to the market. Sales are expected to return to their annual pace, approximately 85,000 units, by 2021.

During the recessions of 1990-92 and 2008-09, home prices rebounded quickly and wound up being higher than their pre-recession levels within a year of falling. (The 1981-82 housing crash remains a ghastly outlier that saw mortgage rates climb by 22%.) That is almost certain to be the case after COVID-19. BCREA’s model sees the average price of homes in the province plummeting between March and July, but it predicts a return to pre-COVID-19 levels by September 2021.

As novel as the coronavirus is, it seems to be no match for supply and demand.

“Even with this slowdown, people are still buying houses,” says Dominion Lending Centres’ Fernando Zilli, who operates out of Victoria. “There’s just so much pent-up demand. I’ve got people that are champing at the bit, getting pre-approvals and waiting for things to open back up. As soon as we go back to ‘normal’, it’s going to be a virtually instantaneous rebound.”

Both Zilli and the BCREA caution that a return to business-as-usual is far from guaranteed, particularly if communities weaken in their commitment to social distancing and the number of COVID-19 infections begins rising again, as is expected in the fall. The longer this period of suppressed economic activity lingers on, the report states, the more likely it becomes that “jobs do not return, businesses fail, and the recovery is much slower.”