The first two months of 2021 have revealed an interesting dichotomy. While many parts of Canada remain in the grips of a pandemic lockdown, real estate and capital markets are running hot as a result of growing optimism due to the roll out of COVID-19 vaccinations. It is in this context that we asked Thomas Kim, Vice President and Managing Director, Capital Markets at First National to share his perspectives on recent economic and market developments and what they may mean for the future. This interview was recorded in early March 2021.
Thomas, what do you make of the state of the housing market today? It’s almost supercharged at a time when the economy is still struggling.
I take the view that the market is the market. By that I mean volumes and prices are set by the market and it’s hard for anyone to second guess these developments and decide whether they are correct or acceptable based on some sort of theoretical framework. Canada is a desirable place to own property and a magnet that draws people from around the world and for the foreseeable future it will continue to be so. Prices also reflect a supply challenge.
What do you mean?
It’s difficult to bring new supply of housing stock onto the market and that’s true in just about every jurisdiction and certainly in our largest cities. When there is a demand-supply imbalance, prices will be affected.
What about interest rates? Is there an expectation that they will move upward this year?
We’ve already had a big change in bond yields. Five and 10-year Government of Canada bond yields are up about 60 basis points and the bulk of those moves has happened just in the past few days. It’s been an amazing rise. This change is a reflection of optimism that the economy and employment will be quite a bit stronger on the other side of the pandemic and that the roll out of vaccines will allow a return to something more normal pretty quickly. Since bond yields move through everything, we will see this reflected in mortgage rates, no question. In fact, we already have and notably, the central bank had nothing to do with it. The BoC’s overnight rate is unchanged.
What about inflation?
There is a concern about inflation down the road because of extraordinary monetary and fiscal actions to date. But what’s notable is that all of the liquidity that has been added to the system has really gone into financial assets. It hasn’t yet translated into what you would think of as GDP transactions, which is where inflation of the kind that would concern central bankers shows up. There is still slack capacity in the quote unquote real economy.
It was just about a year ago that the pandemic was declared. In hindsight, did conditions in the capital markets turn out as you originally expected?
Back then, I was hoping certain economic supports would be offered by the various departments in Ottawa. I never imagined just how vigorous the response would be from everybody involved…the Bank of Canada, CMHC and the Department of Finance. At all levels, the support was far more dramatic than just about anyone thought likely or possible. There will always be critics, but you can’t argue with the results. These actions prevented a collapse in the economy and in the market.
Was there anything that you thought would happen that didn’t?
Yes, last February/March, I thought the lockdown would be far more severe, almost more militaristic in an effort to keep the infection rate down. It was fortunate for the economy that it didn’t happen that way. But I think society went from being pretty blasé about COVID-19 in February to being extremely concerned by the second week of March 2020 and then by the fall, back to being almost casual about it. After the initial shock, the attitude was pretty sanguine.
Capital markets were also relatively calm, until recently.
Correct. Although it seems completely unrelated to Canadian real estate and mortgages, the whole GameStop saga has given way to a period of volatility and market distortion. We also see this in bitcoin prices and in bond yields now exploding as I mentioned. It’s not so much the fact that these things are rising, it’s the speed with which they are rising. Big moves like this are an indication that something is going on. It’s just not possible to say what that something is.
As optimism grows and more vaccines arrive, we may see governments begin to withdraw support. Is that cause for concern?
It’s difficult to tell everyone to stay home if there isn’t some sort of support in place. Similarly, on the business side, you can’t tell an owner to shut down and stay closed without providing assistance. So it’s a short run concern for sure and a challenge for policymakers to get the timing right on the wind down.
How has the pandemic changed or challenged First National’s Treasury Department and your strategies?
There is no direct link between the course of the pandemic and what we do in our jobs. We’re always focused on helping First National grow and setting up the company for a successful year.
Is there anything positive that has come out of the pandemic in terms of how you do your jobs or how the capital markets function?
The positive is that we’ve discovered we can work from home, as can our business partners and bond traders, and still get the job done. A year ago, people would have scoffed at that idea and said it was impossible. They were wrong. We’re also a lot better at working from home than we were 12 months ago and a lot of that is due to learning how to collaborate and communicate using technology. We have to be a lot more deliberate about this because it’s not currently possible to have conversations around the water cooler or in the hallway.
How is work from home likely to affect demand for commercial office space?
The world is never going back to normal, but that does not mean we need less office space. Even technology companies that are at the leading edge of remote work are still building massive amounts of office space all over the world. They are investing in the future because it is important to have a physical location. It’s all the unseen stuff, the cultural clues, that go missing without office space.
Do you see a new direction or outlook emerging this spring?
I think as we go into the spring and summer, it will be a little like last year when everything got a little easier and COVID case counts dropped. Certainly, all the economic forecasters and the bulge-bracket banks are expecting that we are going to come out of the current malaise quickly. In the market, everybody is simply looking past the next few months to better times ahead.
Any other thoughts for 2021?
We’re certainly focused on securitization and doing more of it this year and generally being a good partner. I’d like to think that all of our various customers…mortgage brokers, borrowers and investors will see First National as a very stable and trusted partner based on what we achieved together in 2020. When I look back, I’m proud of the fact that we didn’t make any sudden moves, we didn’t shut anything down or scale anything back. We were a constant partner, a company to be counted on.
To hear more from Thomas, please watch for his periodic Market Commentaries at www.firstnational.ca/commercial/resources-insights.