Vancouver real estate now a ‘riskier’ asset, experts say

Vancouver residential real estate has become a “riskier” asset, leading banks to raise interest rates and reduce access to money despite the Bank of Canada’s decision to cut its overnight rate, says University of B.C. Prof. Tsur Somerville.

Somerville said he wasn’t surprised that the spread between mortgage interest rates and the Bank of Canada rate had grown.

“Real estate is now perceived as riskier (for banks) than it was three months ago because there’s a realization you could have people stop making mortgage payments or rent payments en masse. Normally in a downturn that evolves slowly,” he said.

On March 27, the Bank of Canada lowered its overnight interest rate to 0.25 per cent to help stem the COVID-19 financial crisis that has seen more than 2.1-million Canadians file for EI in the past two weeks and half-a-million ask for mortgage deferrals.

Traditionally, a drop in the Bank of Canada overnight rate leads to a drop in mortgage rates. But Somerville, director of the UBC Centre for Urban Economics and Real Estate, said the current crisis was highly unusual.

“In the (2008) financial crisis there were different sorts of uncertainties around. They were economic, so you could understand a bit about what the phenomenon was. But with this it’s not the economy grinding down slowly, it’s not a financial panic, it’s not an economic shock. It’s a public health shock. That’s very, very different and we don’t know how it will be on the other side,” he said.

For example, it was impossible to predict how trade and tourism — two mainstays of the provincial economy — would respond once social-distancing restrictions were relaxed or lifted.

“With trade, do we get de-globalization? With tourism, do we get people living for the moment now and being tourists or do people get fearful?” Somerville asked, while pointing out that all the debt governments are taking on to support the economy will have to be repaid.

“Governments are rightly loading up on debt to get us through. But on the other side you have to pay off that debt. But what if we have a five per cent tax to repay the debt? Well, that slows the economy. We have so much uncertainty that it’s very hard to think about where things might be once we have more certainty. How we relate to each other is going to be different.”

Vancouver realtor and commentator Steve Saretsky said it would take at least a year before heavy discounts in residential prices appeared, because real estate wasn’t a liquid asset. He said it also takes 18 months for default properties to be sold.

However, he warned that price drops were coming, for a number of reasons.

First, the economy would be fundamentally changed due to unemployment and weak economic growth due to coronavirus restrictions.

“The reason real estate has been so good over the past five years is that we have had low unemployment, a relatively strong economy and low interest rates. That allowed everybody to get a mortgage and leverage up and that pushed prices higher,” Saretsky said. “Now we are in a situation where the economy is going to be really weak, unemployment is going to be high and banks are going to be tight.”

Tightness in the money market is the second reason.

“Even if you want a mortgage, they might not give you one,” Saretsky said.

And third, Saretsky said that consumer insolvencies are going to go up due to rising unemployment. “Everyone thinks prices will be down 10 per cent by May,” he said.