Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
The Bank of Canada is updating its primary forecasting model to include real estate and debt. The Terms-of-Trade Economic Model (ToTEM) will move to its third iteration soon. Amongst the many improvements, the BoC will now consider the impact of credit on home prices. Yes, Canada’s monetary authority didn’t believe the two were related… despite the belief lowering interest rates increases demand for mortgages.
Canadian building permits made the historic nosedive, making an unbelievable drop. The dollar value fell to $9.5 billion in May, down 14.8% from the month before. A pullback was expected, after four consecutive months of new record highs. The size of the drop was unexpected though, being the largest on record.
Canadian real estate may be problematic for new generations, but not even close to all. Royal LePage published its Boomer Survey for 2021, looking at their market perspective. The survey found 35% of Boomers are considering moving in the next 5 years. It works out to 3.2 million considering a home buy. High prices don’t appear to be a deterrent, with a third considering buying a home.
The reason is most likely due to how much they made on real estate, and how much of their net worth is in it. The majority (75%) own their home, and two-thirds don’t have a mortgage. One in five have at least two properties, and 40% have more than half their net-worth in real estate. It wasn’t a burden for them, it was a windfall. Many are willing to place more bets at the table, instead of walking away too.
Canada’s real estate slowdown is taking its toll on revenues for the industry. Stat Can data shows the real estate, rental and leasing, sector of GDP fell to $264.3 billion in April. It’s down 0.75% from a month before, with the sector now 13.4% of GDP.
Canada’s economy is still dependent on real estate, but things have slowed since the peak. Even with the slowdown, it will exit the pandemic a lot more dependent on real estate than it entered. Which is really something.
Canada’s money supply is growing at early-80s levels, but growth is tapering fast. Annual growth for the M2++, a broad measure of the supply, came in at 12.8% in April, the largest rate for the month since 1981. It’s down from the February peak of 14.3%, which is a substantial drop.
Bank of Canada research says the measure is a leading indicator for inflation. They found inflation tends to follow M2++ movements 12 to 24 months after. That implies inflation may see a taper in a couple of years, but we still haven’t seen the full increase yet. Unless the central bank intervenes and raises rates to shock inflation.
Canadians are leaving very large down payments when buying a home. Expensive provinces are seeing larger down payments, such as BC (22.5%) and Ontario (20.4%). More affordable provinces such as Nova Scotia (18.54%), Alberta (15.15%), and Quebec (14.68%) were much lower.
This is likely due to the number of first-time buyers than can afford each market. In BC, for example, only 10% of buyers are first-time, with the rest having equity to leverage. The size of a 22.5% down payment in BC, is almost half the price of a home in some parts of Quebec.
Small city home prices have been soaring faster than big city ones, shrinking the gap between the two. A home in the Woodstock-Ingersoll region now costs 60.2% of buying in Toronto. That’s up 28.7% from the average gap for the region.
In BC, buying in Chilliwack is now 59.6% of the ratio of buying in Vancouver. It’s an increase of 18.2% from the long-term average for the region.
Flattening prices between big cities and tertiary markets are often a bubble sign. In these situations, the premium for being located near big city amenities shrinks. Buyers don’t care about where the home is located really. They just want to buy a home now, because they see prices rising forever, and causing more pain later. This is typical behavior in a bubble. People think home prices will outpace incomes forever, despite it being impossible.
BMO has come up with an unconventional Calgary real estate indicator. The bank looked at the ratio of home prices in Calgary and Windsor, against oil prices. Calgary and Windsor home prices historically have had an inverse relationship. Oil being the common relationship that moves both.
Cheap oil historically pushes Windsor home prices to gain on Calgary. Now they’ve become more expensive than Calgary homes for the first time. Expensive oil prices tend to push Calgary home prices faster than Windsor. Now that oil prices are rising, they see Calgary home prices rising as well. Though Windsor falling would do the same to the ratio as well.
Newly built homes in Canada have seen absorption slow, but luxury homes slowed faster. Across Canada, 10,278 units were sold in April, up 10.8% from last year. Luxury homes, priced over $1.7 million, only saw 302 units absorbed, down 25.4% from a year before. Both numbers made a monthly decline as well, showing a slowdown from peak activity this year.
The interesting part is the annual growth though, which was boosted by a base effect. Even with help pushing numbers higher, the luxury segment couldn’t print a gain. Since this segment tends to lead the market, it’s worth watching closely.
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