Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
BMO is warning investors to make sure they really want that property, because they may be stuck with it for a while. The bank is seeing the factors that sent home prices to “dizzying heights” begging to reverse. Vaccination deployment and rising home inventories will cause the market to “crest” or top. If those factors reverse, recent buyers would have to ride out negative equity.
More supply is supposed to make home prices fall, but they’re accelerating as more are built. Despite what you heard, that’s how things should actually work. Builder costs are also subject to the concepts of supply and demand. The more they build, the bigger the squeeze on resources to build. The only way to add supply without causing higher prices is to build after a price correction. A recent study even found a large increase in rental supply is unlikely to have an impact on rental prices.
Canadian office vacancies are soaring to the highest level in a generation. The vacancy rate reached 14.6% in Q1 2021, up 10.0% from a year before. In Greater Toronto, office vacancies “nearly doubled” to 12.4%, the highest level since 2005. The bank doesn’t see the end of offices, just that more preference will be given to spaces in smaller cities. They suggest young adults will still prefer to live in social clusters. However, more of the activity will shift to regions with “affordable” housing.
Canada was warned not to extend more credit or provide more incentives to homebuyers. Both actions only serve to produce higher home prices. Obviously, they took the warning and created a plan to increase home prices. Starting May 3, 2021, Toronto, Vancouver, and Victoria will see their shared equity programs for first-time buyers expand. The expansion of the program will see buyers in these regions receive 12% more leverage. Previously the IMF and the country’s banks warned against moves like this.
BMO is asking Canadian investors to look across the lake for a little perspective on home prices. Cleveland is seeing its fastest climb in home prices ever, with March prices up 12.5% from the previous year. Directly across the lake in St Thomas, home prices increased by 43% from a year before. The bank found prices have increased more over the past year than they have from 1980 to 2010.
Canadian real estate sales are forecast to slow, and it’s going to be a drag on the recovery. Spin-off economic activity alone is forecast to bring in $46.42 billion of GDP activity, up 27.99% from a year before. The industry expects sales to taper 12.6% lower by 2022, as things normalize. Spending on homes is such a large part of the economy, even a slowdown in spin-off activity can shave off nearly half a point of GDP growth.
Canadian GDP is recovering much faster than expected, and it’s mostly due to real estate. In Q4 2020 GDP reached $2.1 trillion, down 1.5% from the previous year. When you exclude residential investment, the annual decline is actually 3.4%. At the aggregate level, the economy looks like it has almost recovered. It has at that level, but when examined closer — real estate consumed spending in other areas.
Canadian retail spending is up, but nearly a third of growth is on building and renovation. Sales reached $55.1 billion in February, up 6.0% from the year before. Building and garden supplies represented 29.0% of the increase. This means while spending has increased, it’s not going to the same segments. Housing investment is diverting even more funds from other areas of the economy.
Canadian real estate prices have grown quickly before, but never quite like this. A typical home across the country has seen prices rise $119,700 over the past year. The increase over the past 12 months is similar in size to nearly the 4 years prior. In North Bay for example, prices over the past 12 months increased by more than they had in the prior 15 years. Years of growth have been crammed into just a short window.
Canada’s national statistics agency found the big immigration hubs are losing appeal. Toronto, Vancouver, and Montreal have been important hubs when immigrants arrive in Canada. Data shows those who arrived over 10 years ago are more likely to have settled in the Big Three hubs. New and more recent immigrants are increasingly choosing small cities and towns.
Canadian consumers are more pessimistic, while American optimism soars. Canadian consumer confidence fell to 98.4 points in April, a sharp drop of 6.8 points from a month before. In the U.S., the Conference Board found consumer sentiment hit 121.7 points, up 12.7 points from the month before. This follows another massive 18 point increase the month before. U.S. optimism is now higher than it was pre-pandemic. Meanwhile, Canada’s third wave has temporarily dampened optimism.
U.S. Real Estate
U.S. rental prices made a small increase as a whole, but all growth is from traditionally cheap cities. The national median rent for a 1-bedroom reached $1,245 in April, up 2.1% from a year before. In markets like Durham and Cleveland, rental prices increased by more than 26%. Traditionally expensive cities like San Francisco and Seattle dragged the index lower, with rents dropping by more than 20%.
U.S. real estate prices are seeing the fastest growth since 2006. The National Index increased by 12.0% in February, compared to a year before. Metro indexes were growing a little slower, but not by much. The 20-City Composite, the 20 largest metro areas, grew 11.9% from a year before. The 10-City Composite was even slower with an 11.7% annual growth. The metro indexes are the highest growth since 2014.
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