Retailers go broke, property and oil fall but maybe the economic pain will speed beneficial changes

By: Don Pitts

As people are thrown out of work, as businesses fail and as the oil and housing sectors weaken, there is a branch of economics that insists it all may have a silver lining.

Just last week the retailer Pier 1, familiar to many Canadians, gave up attempts to refinance and announced it was shutting its doors for good. Almost simultaneously, the venerable Canadian fashion chain Reitmans went into bankruptcy protection.

Those are just some on the list of famous names that are in financial trouble during this COVID-19 lockdown, including J.Crew, JCPenney and Cirque du Soleil.

As people stop flying, the head of Boeing has suggested a major U.S. airline may fail, and globally, many smaller carriers are at death’s door.

As the CMHC worries Canadian real estate prices will crash by as much as 18 per cent, the oil industry struggles to recover from negative pricing and unemployment rises toward Depression levels, it is hard to see the bright side.

But according to the theory of creative destruction derived by Austrian economist Joseph Schumpeter in 1942 from ideas proposed by Karl Marx, economic and technological progress demands that businesses must die and industries and paradigms must be swept away to make room for new ones.

Canadian economist Peter Howitt, recent winner of the Frontiers of Knowledge Award for his work proving Schumpeter’s principles in the real world, said that while the creative destruction process is happening all the time, economic crises speed the process along.

“When old firms or technology or skills or whatever are hanging on, they can last a long time until things get really bad,” said Howitt. “It’s typically during a recession that a lot of the destruction takes place.”

The implication is that while those in retail or the oil business or the real estate industry may insist that the COVID-19 lockdown has been the cause of their failure, the economic crisis may instead be a trigger, a catalyst for a process already underway.

We already knew traditional retail was being challenged by tech giants Shopify and Amazon or by big-box discounters like Costco, but it was the downturn that pushed struggling companies like Pier 1 over the edge.

Part of a reset

Many have suggested in the past that the overleveraged housing market was an accident waiting to happen. In a broader sense, some economic thinkers say the current backlash against China and against globalization or even against the social structure of rich and poor is part of a reset for which pressure was already building.

According to Stephen Williamson, an economist at Western University, it may be dangerous for governments to try to push too hard against the economic forces at work in dying industries such as the fossil fuel sector.

“It doesn’t look like, at least the exploration and extraction part of the industry, is really viable a long time into the future,” said Williamson. “It seems hard to justify a huge bailout for those guys.”

From the smallest businesses to the largest, the rigours of recession can act as a torture test.

For businesses like that of Sean Davey, who after losing his job with the Royal Bank as a stock analyst in 2016 turned his mathematical skills to founding Rithmetic Math Club, surviving recession can mean prosperity afterwards.

Slipping into the language of his former job, Davey said his idea was to create “a cash-flow positive, low-risk business” that could grow slowly.

By converting his after-school sessions to Zoom, Davey said the vast majority of his 100-odd clients remain on board and he expects business to grow despite the disruption.

“What is in little doubt is that the COVID-19 crisis, which has turned so many people’s lives upside down, will eventually produce a wealth of new business opportunities,” The Economist magazine said earlier this month in its Schumpeter column, named after the famous Austrian.

Putting on a happy face

Responding to a complaint from some critics that creative destruction is merely a way of putting a smiley face on economic destruction, even as a proponent of the idea, Howitt does not minimize the notion that economic change is a painful process.

“Since the industrial revolution, people’s lives have been destroyed by new technologies,” he said, and while there are winners, workers and investors in the so-called “sunset industries” such as dying retail pay a price.

Both Williamson and Howitt say that even while it may pave the way to future innovation, a recession hurts innovators, too, as investment capital dries up and lenders withdraw from risk.

Turning science into business

At the University of Toronto’s Creative Destruction Lab, that gloomy view cannot stand in the way of Mara Lederman, who is firmly focused on the creation side of the creative destruction dichotomy.

Founded by artificial intelligence pioneer Ajay Agrawal at U of T’s Rotman School of Management, CDL has been turning “deep science” generated by university scholars into businesses that help transform the economy.

Lederman said a motivation for the non-profit lab was that Canadian universities were doing incredible science that only other scientists would see.

“What we need to do is take the science that’s being discovered and turn it into businesses, products and services for the betterment of humankind,” she said.

As an economics professor, Lederman is well-versed in Schumpeter’s ideas but she sees the current volatile times as an incentive to develop new ones. That’s why the group founded a new division called CDL Recovery to address health or economic recovery challenges created by the global COVID-19 crisis.

The group has already helped accelerate projects, including a wristband to determine if employees fail to maintain physical distancing, a system to monitor long-term care in a time of pandemic and a technology that uses artificial intelligence vision to keep track of care residents with a tendency to wander, to mention just a few, said Lederman.

“Are we in the kind of situation that is going to unleash creative destruction? I think the answer is yes.”

By: Nicole Sullivan

Despite sudden drops in housing market sales activity in the last two months, almost two-thirds (60 per cent) of buyers still consider 2020 a good year to purchase a home.

A recent survey by Zolo shows that even with higher unemployment and uncertain business conditions, buyers still intend to buy a residential property either this year or over the next five years.

The survey, which polled more than 2,100 North American households between April 15 to 17, 2020, shows that despite an economic slowdown due to the COVID-19 outbreak, the demand for residential real estate is still quite high — with 16 per cent of buyers planning to buy this year and another 47 per cent planning to buy within two to five years.

“This year buyers see an opportunity to get into the market at a discounted price,” explains Romana King, director of content for Zolo, the largest independent real estate brokerage and one of the most popular online property marketplaces in Canada. “Current buyers expect a 5 to 10 per cent drop in purchase price due to the impact of COVID-19.” That’s a savings of almost $87,000 based on CREA’s Greater Toronto benchmark price (the latest data ending March 2020).

“Prices may dip, but expectations of big price cuts may be unrealistic,” cautions King. Even though sales activity in Toronto is down by more than 67 per cent since the start of the coronavirus outbreak, King is confident sales activity will return to pre-COVID-19 levels.

“Any time there is market uncertainty, the market responds with a momentary pause until buyers and sellers can absorb the change and return to transactions.” King points out that this is what happened after the introduction of the Fair Housing Plan in the spring of 2017. “A few months after the regulatory changes, market activity rebounded, and prices began to increase, once again.” The same scenario would play out again after the introduction of the federal government mortgage stress test in January 2018.

Prior to the pandemic, Toronto was on track for a hot spring selling season with a 46-per-cent year-over-year increase in sales activity for the month of February, according to data from Zolo and the Canadian Real Estate Association (CREA). “Even before the outbreak, inventory was limited. Since the outbreak, there is significantly less inventory which means buyers have fewer options. Sustained demand with reduced inventory should keep prices stagnant in 2020.”

Given the requirements for social distancing and self-isolation, much of the stalled activity is due to inaccessibility of properties. One result is that property sits on the market longer. As of April 2020, the average number of days a listing was in the market was up 35 per cent, year-over-year, to 25.4 days.

To keep the market going, many realtors and tech-savvy brokerages, like Zolo, offered online and virtual tools as well as mobile-ready access. It turns out, buyers were waiting for this nudge into the virtual world with 52 per cent of the respondents reporting that they would “prefer to complete the entire home buying process using only online tools.”

That doesn’t mean buyers want to replace their realtor with a computer. Almost half (48 per cent) of home buyers still prefer to work with a realtor, and more than a third (35 per cent) still want to attend open houses. However, 38 per cent would like to use a mobile app, 34 per cent want to use virtual tours or pre-scheduled video walk-throughs, and another 10 per cent want access to professional square-footage floor plans. (Multiple responses were allowed for this survey question.)

Buyers and sellers can expect lower-than-average sales activity probably for the remainder of the year, says King. However, she doesn’t anticipate significant price reductions, particularly in the most sought-after neighbourhoods and price bands. “Buyers and sellers will continue to adopt online and virtual tools, which will help increase sales activity, despite continuing restrictions due to the pandemic,” she says.

“While, there’s no doubt the housing market came to a temporary standstill due to COVID-19, buyers still want to get a piece of this city’s robust property market. For many, homeownership is still the cornerstone of financial stability,” says King.

The findings of the Zolo Homebuyers Intentions Survey are based on an online survey conducted by Zolo.ca between April 15-17, 2020, of 2,128 respondents who live in North America. The estimated margin of error is +/- 2.12 percentage points, 19 times out of 20.

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By: Laura Grace Tarpley

Everything you thought you knew about buying a home has probably flown out the window during the coronavirus pandemic.

Yes, interest rates are at historic lows — but they’re also jumping up and down, making it hard to know whether you’re getting the best rate possible.

Lenders are changing their criteria for borrowers to avoid lending to people they view as financially unstable during the crisis. Companies that once offered mortgages to people with credit scores of 620 are now requiring scores of 680 or even 700, and some are demanding higher down payments.

Buying a home can be confusing under the best of circumstances. But now that the process is changing every day, you may be looking for help.

Now could be a better time than ever to use a mortgage broker — the middleman between you and a lender — who can help you find a lender with the best deal.

What is a mortgage broker?

As you prepare to buy a home, you might research a few lenders and choose the one with the best rates — or, depending on your credit score and money for a down payment, simply the one that will offer you a loan.

A mortgage broker’s job is to do all that research for you. They have partnerships with a variety of lenders, and they set you up with the best fit based on your financial situation and preferences.

“They will often have a wide array of loan products that are available to them,” said Andy Taylor, General Manager of Credit Karma Home. “Think of a broker who has access to 25 different wholesale lenders. Those are wholesale lenders that that average consumer wouldn’t be able to reach any other way.”

Using a mortgage broker as a middleman gives you access to lenders you may not have known existed, some of which only do business through mortgage brokers.

“The benefit of using an independent mortgage broker … is that they shop on your behalf and they’re going to get you the best loan,” said Alex Elezaj, the Chief Strategy Officer of United Wholesale Mortgage, a company that only works through brokers. “That’s the best way to do it, because they’re working with multiple lenders, and you don’t have to try to figure out, you know, ‘What does this mean?’ and ‘What does that mean?'”

Try asking people you trust for mortgage broker recommendations, like friends, family, or your real estate agent. You can also check trustworthy review websites such as Angie’s List and WalletHub.

You might stumble upon a mortgage broker that will charge you a fee, but many brokers are paid by the lenders they have partnerships with, not the borrowers. To be safe, ask a broker how they make money before working with them.

Mortgage brokers could help you get a loan and lock in a low rate during the coronavirus pandemic

Using a mortgage broker could actually be your ticket to getting a loan during this hectic time.

“If you went straight to Chase right now and you had [a credit score of] less than 700, you would be out of luck,” Taylor said. “You just wouldn’t be able to find a loan. But imagine that you went to a broker and they said, ‘Hey look, I’ve got some lenders in my wholesale network that have standards up to 700, but I actually have many that are still pricing 660 to 680. That … could actually allow you to get a loan.”

And if you have a good credit score and plenty of money for a down payment, a broker can also help you lock in a low APR as rates rapidly fluctuate. A mortgage broker does the research for you among the lenders they work with, which can save you a lot of time and stress, and ultimately land you a better rate.

“The only thing that I would say a broker might not be the best area to win in is maybe with a jumbo loan,” Elezaj said. Jumbo loans are mortgages exceeding the loan limits set by Federal Housing Finance Agency (FHFA), which is $510,400 for a single-family home in most US states. “Banks will typically be a little bit more competitive on jumbo loans because they want the customer acquisition of checking, savings, car loans, all of that stuff.”

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By: Geoff Zochodne

The economic shock caused by the coronavirus pandemic will have the housing market in flux in 2020, and its lingering effects could lead to lower resale prices when the dust begins to settle, according to economists at the Canadian Imperial Bank of Commerce.

“The expected volatility in overall economic activity in the coming quarters will not skip the resale market,” CIBC economists Benjamin Tal and Katherine Judge wrote in a report released Friday. “By 2021, as the economics of housing returns to fundamentals, we expect an array of factors to result in a weaker market with some downward pressure on prices.”

Demand will drop because of a weak jobs market and weaker investment, expect Tal and Judge. Meanwhile, some homeowners will be forced to sell, increasing supply to the point it could outweigh the effects caused by reduced supply of new housing.

“Overall, as the fog clears, we expect to see average prices 5-10 per cent lower relative to 2019 levels, with high-cost units in the high-rise segment of the market seeing the most notable price declines,” the CIBC economists added.

The prediction comes as the economic fallout from the COVID-19 pandemic has forced hundreds of thousands of Canadians off the job and without the stability they may require for big purchases, such as a new home. The desire for physical-distancing and concern about going into a stranger’s home has also posed challenges for the real-estate sector, which has been forced to adopt virtual property showings and to slow construction amid the outbreak.

National home sales dropped by 14.3 per cent month-over-month in March, although they were up 7.8 per cent from a year earlier, according to the Canadian Real Estate Association. CREA’s home price index rose 0.8 per cent in March compared to February and by 6.9 per cent over a year earlier.

However, March was sharply divided for the housing sector, with much of the sales activity recorded in the first half of the month, before the implications of COVID-19 set in.

“Numbers for March 2020 are a reflection of two very different realities, with most of the stronger sales and price growth recorded during the pre-COVID-19 reality which we are no longer in,” said Shaun Cathcart, CREA’s Senior Economist, in a press release.

The CIBC economists wrote that the resale market is now “basically frozen,” with sales and new listings in Toronto down by 69 per cent and 64 per cent on a year-over-year basis as of mid-April.

“If you really don’t need to, you probably aren’t conducting any real-estate transactions at the moment,” Tal and Judge wrote. “Therefore, the price signal that we are getting from recent data is both weak and misleading.”

The cumulative damage suggests that when we recover, potentially at one point in 2021, we will be recovering into recessionary conditions

In the meantime, Canada’s unemployment rate is heading to upwards of 13 per cent from a pre-crisis level of 5.5 per cent, the CIBC economists noted.

Even with the introduction of a vaccine the economic recovery could be sluggish. Much of the rise in unemployment represents temporary layoffs and jobs that will be regained in the recovery, but some of the economic damage being done will linger longer, Tal and Judge added. This could leave unemployment at around eight per cent next year, they suggest.

“The cumulative damage suggests that when we recover, potentially at one point in 2021, we will be recovering into recessionary conditions,” Tal and Judge said.

While moves by the Bank of Canada to lower interest rates and inject liquidity into the financial system are helping with mortgage rates, the cost of borrowing “is always secondary in an environment of low confidence, increased unemployment, and slower income growth,” the CIBC economists wrote.

The pandemic has also prompted more than 700,000 Canadians to defer payments on their mortgage, according to the Canadian Bankers Association. That will delay an uptick in home loans going into arrears, the CIBC World Markets report said, but there will be a moderate rise in 2021, to an arrears rate of just below 0.4 per cent.

By: Steve Huebl

While Canadian lenders stepped forward with unprecedented measures to assist those affected by the COVID-19 pandemic, there were still some homeowners unable to make their mortgage payments over the past month.

As many as one in 20 homeowners (6%) said they missed their mortgage payment recently due in part or in full to the ongoing pandemic, with another 5% declining to answer. That’s according to new data from Forum Research. The survey, which polled 1,335 people on April 13, found that of those who had already missed a mortgage payment, upwards of three quarters (76%) said they will miss another mortgage payment before the pandemic ends. Although Forum Research cautions that this is based on a very small sample size.

Nearly half (46%) of the survey’s respondents said they were denied mortgage assistance, such as a mortgage deferral, from their financial institution, while 8% said they successfully received assistance.

According to the Canadian Bankers Association, as of April 9 nearly 600,000 Canadians had so far been approved for some form of mortgage deferral assistance.

Renters also reported a high percentage of missed payments, with up to one-sixth (14%) saying they missed a rent payment due to the pandemic. And of those who said they hadn’t missed a payment, 1 in 10 (13%) said they expected to miss a future payment.

Mortgage Rates Falling

Follow a rapid rise in mortgage rates last month, risk premiums due to market and liquidity concerns are falling by the wayside and lenders are quickly bringing their rates back down.

This includes both fixed and variable rates for new borrowers, with some lenders reducing rates by as much as 30+ bps over the last couple of weeks.

But there’s still a ways for them to fall in order to reach historical levels, according to some observers.

“This time last year, the lowest widely available uninsured 5-year fixed was 145 bps over the 5-year government bond,” wrote Rob McLister in a recent RateSpy.com post. “Today that spread is 221 bps. If spreads get back to the 150-bps range in 6-12 months and bond yields linger around these levels, a new borrower with a $300,000 5-year fixed could save up to $17,000+ in interest over five years.”

Consumer Confidence Plunges

Unsurprisingly, consumer confidence in Canada has dropped off a cliff in the face of the COVID-19 pandemic.

The Bloomberg Nanos Canadian Confidence Index fell to its lowest level since it began tracking data in 2008, with a reading of 38.7, down sharply from a mid-50s range recorded at the start of the year.

The survey found an increased level of anxiety among consumers. Four out of five (79%) said they believe the country’s economy will worsen before it improves, which is up from 74% just last week. Prior to that, the last high was 57% set in 2008.

A full 36.9% of Canadians also said their finances have worsened over the past year, reaching a new record.

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