The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
J. M. Keynes
In line with our expectations, the Canadian housing market has held up despite the COVID shock. For Canadians, this is crucial as a resilient housing market leaves consumers in a more robust shape as we navigate through this COVID world. Despite high uncertainty and a wave of unemployment, sales and construction activity have fully recovered. Home sales collapsed by a record 63% over March and April but have bounced back to pre-COVID levels. Construction activity has fared even better, with housing starts down 22% over the same period but have since rebounded above pre-COVID levels (Chart 1). Sales-to-listings ratios have also recovered to above 60, indicative of a seller’s market and supportive of home prices.
Ultra-low interest rates, pent-up demand, and changing consumer tastes have driven the speedy recovery. Past population growth and tight labour-market conditions underpinned strong pent-up demand to be unleashed after COVID effectively delayed the spring buying season. The labour market has deteriorated, but the most affected groups of workers–younger age cohorts–have lower homeownership rates. Past immigration growth, whit a net 1.1 million immigrants arriving in Canada since 2016, will remain a tailwind this year as it tends to drive home buying activity at a lag. Finally, the exodus out of cities is spurring demand in suburban and rural regions.
We expect housing activity and prices to remain supported into year end, but depending on the path of the virus, immigration and the job-market recovery, 2021-22 is when things could prove more challenging. Mortgage deferrals and unemployment benefits will end in Q4, and population growth will slow dramatically from lofty 1.5% levels as border and travel restrictions slow immigration. Rental prices are most likely to feel the downward pressure given pockets of oversupply in downtown areas. Rental demand is also more affected by COVID as younger ages and immigrants are more likely to be renters.
Chart 1: V-Shaped Recovery for Canadian Housing Market
Source: Haver, BMO GAM (as of August 12, 2020)
International Equity Valuation: You got what you pay for, and then some
The performance of tech stocks in 2020 has surprised investors, but while they trade at higher multiples, their earnings have remained robust in 2020 as the world is accelerating away from the old to the new economy. Looking at trailing earnings, investors were better off owning the more expensive, more digitally intensive tech stocks than owning Russell 2000 whose earnings have more than halved because of the global recession and which trades 10% below its 2018 peak.
Chart 2: Tech Leadership Translating into Stronger 12-Month Trailing Earnings
Source: Bloomberg, BMO GAM (as of August 12, 2020)
Portfolio Update: ETF Portfolios
We introduced an allocation to Canadian MBS ETF (ticker: ZMBS) in the Income, Conservative, and Balanced ETF portfolios, which we funded by trimming our exposure to Short Federal ETF (ticker: ZFS). This trade will provide us with a modest yield pickup while only marginally increasing the credit risk of the portfolios.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.