Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
One of Canada’s largest banks attributed the country’s frothy real estate market to the central bank. BMO wrote, “a surge in demand started by the pandemic, but now set ablaze by the promise of low-for-very-long interest rates.” The statement is an indirect reference to the promise made by the BoC to households. BMO, along with other banks, said low rates led to higher activity. However, the moral hazard created by the BoC’s words created a FOMO-drive frenzy.
Quantitative ease (QE) is increasingly being used as a reason home prices can never fall. Not by bankers, but households are increasingly citing it. If home prices do begin to fall, the central bank could just inflate them with QE. This has helped to launch a new level of exuberance, backed by the feeling homes can only rise in price.
Unfortunately, that’s not how things work. While QE can help to extend the inefficiency of a frothy market, it doesn’t work forever. The only market we have long-term experience attempting to do so, is Japan. The country’s young people increasingly became economically insecure and led to more people failing to even attempt to live a productive life. Failure to launch became a standard way of living. As for home prices? They fell anyway. By attempting to save home prices, they sacrificed a generation of young people. In the end, the impact on home prices became systemic, failing both young adults and the market.
Canadian real estate price growth is often attributed to a shortage of supply, but not this time. BMO, one of the country’s biggest banks, says new listings are at a record high in Greater Toronto. Instead, they blame the central bank’s for triggering FOMO. In a FOMO, or exuberant, driven market, it doesn’t matter how much supply there is. The market takes it out at any level because the only perceived risk is owning too little real estate.
OSFI, the Canadian bank regulator, is revising the uninsured mortgage stress test. The changes would see the maximum amount of leverage home buyers can carry fall by 4.5% when implemented. BMO and the National Bank of Canada (NBC) said it’s a step in the right direction, but the impact will be minimal. Independently, they both said more measures will be needed to cool the market. NBC also states the implementation may also accelerate the market in the near term.
OSFI, Canada’s bank regulator, announced they would be tightening uninsured mortgage leverage. The stress test mortgage rate will increase from 4.79% to 5.25%, reducing max budgets by up to 4.5%. The changes revert the pandemic-easing, which they thought was needed for borrowing. Before the pandemic, OSFI had been planning to loosen the test, not tighten it like they now will be doing.
Canadian real estate markets will cool later this year, says Scotiabank. The Big Six bank suggested policymakers leave the market and watch how it moves over the next few months. They expect listings to rise for the spring market, as well as slow demand. The combination is expected to cool the market on its own. Additional measures run the risk of overly penalizing market holders.
Academics cite everything from NIMBYs to government policy for the lack of new rental developments. It would appear they’ve never just asked a developer, because they’ll tell you, it’s about profit. Falling interest rates inflate buyer budgets, leading to a greater opportunity to sell. The more interest rates fall, the more attractive it is to create homes for sale than rent. After 30 years of falling rates, it’s not surprising they need to pay developers to build them. Private real estate development is a business, not a public service. Just raising interest rates might be enough to change the trend.
Toronto Real Estate
Owning Greater Toronto real estate has recently been a better job than most could ever hope for. The price of a typical home reached $1,007,600 in March, up an unbelievable 16.54% ($142,400) from last year. The gain in the suburbs was more than twice the size of the increase in the city.
One of the interesting points is how much prices increased in just a month — $38,000. That’s for TRREB and the City, implying location of the homes didn’t matter, the monthly increase was across the board. An increase like that is usually due to emotional factors, rather than fundamentals. It’s widely believed the BOC’s assurance to ignore data, and pump cheap credit for a predetermined amount of time, is behind it.
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