Canada

Canadian Real Estate Sales Likely To Drop Further As Money Growth Slows

Canada is being confronted with higher interest rates, and it’s really turning into a drag on growth. Bank of Canada (BoC) numbers show the M1+, a broad measure of money, is seeing significantly lower growth this year. The slowing growth is a sign of economic slowdown, often resulting in slowing sales of assets that require large financing – like a house or car.

What’s The M1+?

The M1+ is one of Canada’s monetary aggregates, and it covers the most liquid form of money. The BoC includes currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. If you can spend it with little notice, it’s included in here. It’s actually a very useful indicator, but rarely talked about outside of the top hat and monocle crowd.

The BoC’s job is to manage the growth rate of money “indirectly,” and this is one of the measures they’re managing. When the BoC raises rates, it costs more to borrow. The result is less borrowing, and more money used to service existing debt. This leads to a decline in the amount of cash in bank accounts, which shows up in the M1+. As people deleverage and get their finances under control, they stop spending as much. That gives us a slowing economy, and starts the end of the business cycle.

M1+ Sees Slowest Pace of Growth For September Since 2003

The pace of M1+ growth saw an uptick in September, but is still well below the median pace of growth. The growth rate of the M1+ reached 4.7% in September, down 44% from the same time last year. We just printed the slowest September since 2003, and remain below the median pace of growth. The slowing is also on target to go lower in the not so distant future.

Canadian M1+ 12 Month Percentage Change

The 12 month percent change of Canada’s M1+.

Source: Bank of Canada, Better Dwelling.

The mild uptick might seem encouraging, but that number is on target to go lower very soon. The past 3 months of annualized data shows the growth rate at 4.3%, lower than it is today. Annualizing data is when we take a short period of time, and project it as if it were the whole year. The 12 month trend can’t grow unless the annualized shorter period is larger than the 12 month trend. As we can see, we’re still on track to go lower – even with a mild uptick.

Canadian M1+ 3 Month Percentage Change (Annualized)

The 3 month percent change of Canada’s M1+, annualized.

Source: Bank of Canada, Better Dwelling.

Rising interest rates are doing what they should be doing, slowing the growth rate of money. The BoC notes that slowing M1+ growth is a sign of a slowing economy, which could be a problem. Things may seem hot on paper, but we’re starting to see much slower cash growth. The impact is first felt in assets that need large down payment and financing, like cars and homes.

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31 Comments

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  • SCE 6 months ago

    In other less biased news…….

    October 2018 Canadian Rent Report

    Overall, 17 Canadian cities saw an upward trend, 4 downward, and 3 remained flat last month. Burnaby took the largest rental dip, down 4.2%, while Montréal saw the largest monthly rental growth rate in the country with a 5.2% increase. The top 10 cities stayed relatively stable with the biggest changes at the bottom. Calgary and Oshawa both climbed into the top 10, tied for 9th, and kicked out Kingston and Hamilton.

    Toronto, ON, holding on steadily as the priciest city in the nation, saw one bedroom rent climb 1.4% to $2,230, while two bedrooms had more modest growth, up 0.4% to $2,830.

    Rents in Toronto for 1bdrm and 2 bdrm now up 14.9% and 16% y/y, respectively.

    https://blog.padmapper.com/2018/10/15/october-2018-canadian-rent-report/

    Tick Tock. BD4L

    Happy renting!

    • Andrew Jerabek 6 months ago

      “In other less biased news…….”

      don’t make me spit out my juice like that.

    • Bluetheimpala 6 months ago

      If you replaced ‘canadian’ with ‘US’, ‘2018’ with ‘2016’ and Toronto with ‘Seattle/Boston/New York/Houston’ then this is like a crystal ball. Don’t know what I’m referring to ? You probably should if you’re referring to inflated rental prices as a result of an asset bubble and suggesting they will go unabated. Tick tock. BD4L.

      • SUMSKILLZ 6 months ago

        I can’t wait for cottage rentals in the woods north of the GTA, to correct. Basic shacks on a lake are going for $2500+ a week during July/August. I was paying $800 a week not too long ago. Its cheaper to go to the Carribbean than rent a lakefront cottage for two weeks. Its completely bonkers.

        • Contrarian 6 months ago

          As interest rates rise for cash deposits, mortgage and car loan rates rise, wages stagnate, unemployment rises, non-essential expenditures decrease which cause vacation property rental and purchasing costs to decrease. There’s also the foreign renter, such as Americans, who have cash worth more than Canadians, renting vacation properties. I’ve seen a lot more Americans visiting Canada since our dollar declined in value relative to the US dollar. Its all about discretionary income/cash, cost, and supply and demand.

    • Robin 6 months ago

      Of course rents are crazy, but where do those numbers come from? Just rented a lovely
      1200 square foot 2-bedroom apartment in Forest Hill Village parking including for less than the $2230 1-bedroom cost in that report. Anyone who is paying those prices is being taken for a ride, and needs to look harder. Apartments in buildings under rent control cost less than half that.
      Maybe it’s like houses, and when the bubble bursts, rental costs will fall as well?

      • Tanya 6 months ago

        They come from people that use Padmapper, which from the looks of it, is pretty delusional homeowners. The MLS has cheaper places, which is impressive, considering you have to pay an agent a fee to list it there.

      • Bluetheimpala 6 months ago

        ‘Reporting’ over inflated rents/’retnal incomes’ supports the narrative that investors will , and should, gobble up anything we put on the market because you’re basically printing money and lil ol’ canada can absorb any pricing. However, as someone noted yesterday, just because you bought a pre-sale on spec does not make you, or Uncle Tony an ‘investor’; they are merely ‘speculators’ or ‘gamblers’. Uncle Tony doesn’t understand cap rates and cash flow any better than he does the female orgasm yet we took out a second mortgage with a private lender at 15-22% on a one year just so he could snap up 5 more units. It is the local ‘speculators’ and ‘gamblers’ who will lose their shirt. Investors are waiting for the blood. Tick tock. BD4L.

    • Professional Landlord 6 months ago

      Renters like the head of the CMHC are really heartbroken. He only makes a few hundred thousand, he can’t buy a tiny condo like you.

      BTW, rents and values have an inverse correlation. The better the cap rate, the lower the rate of appreciation. If you’re financing that asset, your rate of appreciation is quickly turning negative. Negative cashflow speculators like you don’t understand that though.

      You get three years during the largest bull run on all asset prices, and you think you’re an investment genius. I can’t wait until everyone realizes how land lording actually works on long-term investments.

      • Vnm 6 months ago

        Heard an interesting radio show, with call in, about the rental/landlord situation.
        Actually sounds like a lot of professional landlords are pretty fair-minded, good businessmen, decent, in for the long term … and they were universally appalled at the greedy speculative bubble going on, despite it personally giving them opportunities to take advantage of their tenants if they wanted to.
        The problem with lowering interest rates to save the economy is more how the money was used. It wasn’t used to help grow businesses, invest in renewable energy, renew infrastructure, pay down debt, make a better world. It ended up being used as a catalyst to unleash to worst kind of monetary greed. Slimeballs with too much money laughing all the way to the bank, at the expense of society at large, creating more inequality, displacing families, destroying neighbourhoods.
        Akin to the environmental downside of unfettered development. Nice beach house and yacht, too bad about all the dead fish and garbage washing ashore, and rising sea levels.
        Well done, enjoy.

        • Professional Landlord 6 months ago

          You could pillage the land, but then you have the issue where nothing grows afterwards. Taking advantage of tenants lasts for only so long, so does a shortage of housing.

          There were a whole lot of fly-by-night landlords in the late 1980s that thought the professionals with 100+ homes had no idea what they were doing; they can get way more for their home if they just asked.

          When supply eventually caught up and overshot demand (it always does), these people were scrambling with their junky units to find a tenant that would pay a rent high enough to cover their cost basis. When supply catches up, prices fall, usually while interest rates are rising. This leaves them with a rising cost basis, and more incentive for people to buy or rent at newer landlords.

          A good rule of thumb is if well capitalized developers are not building purpose built rentals, it’s because the cap rates don’t make sense in this environment. They’re trying to sell condos, and convincing people that there’s more money in that. When values fall, they switch to building purpose build rentals. That’s when you should be buying, because cap rates make sense. Developers are trying to mitigate risk and maximize stakeholder value. Anyone that thinks they’re trying to make anyone with a 20% downpayment and an ID more money than they can is dreaming.

          • Vnm 6 months ago

            Interesting about purpose built vs condos, thanks!
            It just doesn’t seem to make overall sense that there could be a scenario where developers build condos to sell rather than rent, and a middleman steps in and buys the condo and tries to rent it out for long term profit, except in a crazy bubble when you can flip for a quick gain. In a normally competitive environment in just about any business, that kind of amateur landlord middleman isn’t just not adding value, he’s trying to suck out value, and is soon eliminated by market forces.

          • Dar Robbins 6 months ago

            Professional Landlord,
            I agree. Cap rates are much too low to justify building rental stock. Even if rates were to rise, cap rates would not necessarily improve as the WACC would also rise. Rents must improve for purposely built rental unit construction to begin.

          • Dar Robbins 6 months ago

            Professional Landlord,
            I should add that you actually need both rising interest rates to steer otherwise over-leveraged first time home buyers into rental housing and higher rental income to produce realistic cap rates to encourage rental construction.

  • Dar Robbins 6 months ago

    Young people can’t save as rates are lower than the real inflation. Retirees can live as their saving (assuming they have any left) don’t generate a decent safe return to keep up with rising cost of living. Bankers are just getting fatter and richer. Time for creditors to take a haircut. This economy needs an enema to clear the debt overhang.

    • Dar Robbins 6 months ago

      *Retirees can’t live

    • Jim 6 months ago

      Sure they can. They just aren’t buying. One major issue that people seem to not understand is that rental rates are jumping, but everyone doesn’t move every year and restart against a new rental rate.

      I’ve been living in the same rental for 10 years, my rent moves up at the same rate as inflation. My salary has jumped an average annual rate of 15% during that time. A responsible investor realizes that they need to bank the additional if the want to retire.

      Despite the limited understanding most Canadians have of investment vehicles, there’s a whole world of other investments that can be made. Had you invested in a NASDAQ index, you would have demolished even condos. Everyone thinks they’re a genius investor, but most people have no idea what their cost basis is.

      • Dar Robbins 6 months ago

        I was on deck when the OTC market went no-bid during the GFC. Some traders had tombstones in their eyes. I was also trading at the time of the 20% October crash in 1987 where todays traders weren’t even born. Very few traders have experience in a prolonged bear market. The only reason that markets have been going up for the last few decades is a result of bond yields coming down. These low yields have encouraged leveraged positions and stock buy-backs. It won’t last forever. The NASDAQ guys that have been cleaned-out in 2001 have never recovered.

      • Dar Robbins 6 months ago

        Jim.
        If you’re nearing retirement age, you shouldn’t even be close enough to read the word NASDAQ let alone be in it. You’ve had a good run. Get out and buy utilities and short duration sovereign bonds. A few high quality gold producers wouldn’t hurt either.

  • Scott Beresford-Tipton 6 months ago

    I’ve been living in a two-door car for a while, but I’m thinking of ugrading to a four-door. Any insight as to some good abandoned vehicle locations in the GTO? If possible, I prefer 80s era Town Cars like the one I drove when I was a real estate developer.

    • Dar Robbins 6 months ago

      There always an unlocked unit in the RV dealership in Whitby. Consequently, there’s no need for you to trade your ‘Cozy” two door. Moreover, you’ll need it for commuting.

  • ken 6 months ago

    Here’s some REAL news for you, which reflects reality in Vancouver.
    Luxury rental inventory spiking in Vancouver due to all the multi-million dollar homes that aren’t and won’t sell. Rents dropping fast.
    https://www.vancourier.com/real-estate/high-end-house-rents-plunge-up-to-20-as-inventory-spikes-experts-1.23470074

    Also wanted to say, Better Dwelling reported the BS news that Van home prices increased 1% YoY, which is so ridiculously and blatantly false I felt like gagging. Average price metrics are useless because all they show is how much buyers in a given month had to spend, as opposed to what each house is ACTUALLY worth. Buyers may (or may not)have spend more, but the real question is what those dollars were able to purchase.
    Spending 2m in Van today will get you much more “house” than it did in 2017, so effective prices are down, tho if a bunch of buyers spent 2m one month, the average price would show an increase.

    Just more stats the board uses to intentionally skew the numbers.

  • username 6 months ago

    I need me some more M1 so I can buy up these condos

  • Adrian 6 months ago

    Daniel, The BoC is being disengenous when it makes statements that slowing money growth is an indicator of a recession. Slowing money growth is what causes recessions. By utilizing their monetary policy to remove the financial punch bowl from the market, the BoC is steaming us down the road to a recession and perhaps worst.

    • Trader Jim 6 months ago

      Calling that statement shows a clear lack of understanding of basic economics. I get that this is a blog for people that don’t have a financial background, because their institutional reports don’t explain every little detail, but you should probably understand basic economics before saying the author is disengenious.

      Slowing money M1 preceding a recession is literally from your Econ 101 text book. If that isn’t enough, here’s a senior policy analyst for credit unions saying the same thing, which was posted last month.

      https://twitter.com/ericderoos/status/1051862612562960384?s=21

      The BOC also says it in their guide to money. If you work in finance, ask someone for it.

      • Dar Robbins 6 months ago

        Adrian Trader Jim,
        While slowing money growth may be conducive to slowdown as it’s dis-inflationary, it may not trigger a recession in itself. Notwithstanding, a contracting money supply most likely would. However, I’m sure that’s not in the cards at the hands of the BOC. I’m not a fan of central banks but do believe that rates must progressively rise and normalize to keep the debt bubble from bursting. A controlled slowdown in debt issuance is better than a sudden contraction. Should that happen, it would be massively deflationary.

  • Gochu 6 months ago

    Okay, give me a simple answer.

    Should I buy a condo or not? or I mean it’s a good timing to buy a condo or not?

  • Joe 6 months ago

    It will never be a good time to buy until market fall by 40% or more!

    • Dar Robbins 6 months ago

      A 40% drop in prices sounds wonderful if you’re wishing to buy but you wouldn’t like the economic climate should that happen. Banks nearing bankruptcy would trigger a Buy-In to confiscate your savings account made possible by the late Jim Flaherty in bill C-10.
      You do know that “your” money in the bank is no longer yours do you?
      It’s now the lowest ranking unsecured loan to the bank.
      Look up “Cyprus bank asset confiscation” as it was a test model. Thank you Jim.

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