Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s oldest bank sees interest rates climbing quickly over the next few months. BMO has moved up its forecast by 3 months, and now sees the Bank of Canada raising rates as early as April. Over the next couple of years, they see the overnight rate going from 0.25% to 1.75% and 2.75% to cool inflation. The acceleration of schedule follows central banks admitting inflation is not transitory.
For the past 30 years, central banks have repeated that low rates make housing affordable. The Bank of Canada finally ran the numbers, and discovered that’s not the case. Researchers from the central bank found home prices rise faster after rate cuts. Home prices just absorbed the rate cut, and then some due to the increase in demand.
Don’t you hate when you screw over a generation, and then decide to check your work and realize you made a mistake? Oh well, too late to learn anything from that mistake. Let’s just keep doing what we were doing.
Canadian mortgage debt is reaching epic levels, as it begins to catch up to the whole size of the country’s output. The ratio of mortgage debt to GDP hit 71% in Q2 2021, up 5 points from before the pandemic. Mortgage debt had grown at nearly double the rate of economic output since 1990, when it was just 34% of GDP. Canada has consistently focused on growing home prices over its economy for 30 years.
One of Canada’s biggest banks is declaring next year to be “The Year of The Hike.” The National Bank of Canada has forecast five rate hikes next year, starting in March. They warn despite the rapid climbs next year to curb high inflation, the country won’t be able to go much further. High household debt will limit the Bank of Canada’s overnight rate to the same level as before the pandemic.
Ontario’s real estate industry is looking to eliminate the “customer” segment of consumers. Currently, the province allows brokerages to take clients and customers. A client is a consumer the brokerage has a fiduciary duty to, while customers don’t have that same protection. Consumers are often under the impression they’re the same, but they aren’t. When a broker takes a person on as a customer, they have no obligation to look out for their interests. This is unlike clients, but the average person likely has no idea what the difference is.
That’s why Ontario is proposing just two segments — clients and self-represented. After all, if you’re a customer, you have no representation. It just may not have been as clear as telling the consumer they’re on their own.
The logic is straightforward — cheap loans mean things are more affordable, right? Well, that’s not what the data shows. Our analysis of credit data shows as interest rates rise, the average home buyer’s payment goes down. As rates fall, homebuyers see their cost of purchasing rise. This contradicts the logic often shared by experts and reinforces the Bank of Canada’s research.
Canada is focused on a supply shortage, but no one’s discussing supercharged demand. TransUnion data shows new mortgage accounts are 49% higher than last year in Q3 and 45% higher than 2019. Low rates have sparked an unprecedented amount of buying, but supply doesn’t work that way. The central bank can help print money faster than homes listed for sale.
National Bank of Canada sent traders a Christmas poem about the BoC’s inaction. A parody of the classic Good King Wenceslas was sent, titled Good Guv’nor Macklem. It outlines how the central bank ignored market expectations of responsible monetary policy — cheerily and joyfully. The bank isn’t upset about the situation; it cheers on how this has inflated the stock market and other assets. The BoC has delivered the gift of greater inequality for Christmas. I’m sure we’ll look back on this time, and it will be a heartwarming tale.
The Bank of Canada moved into the reinvestment phase this past November. This involves not growing their balance sheet of government bonds. Instead, they’re only supposed to buy bonds to replace expired ones. That isn’t the case.
Their balance sheet of Government of Canada bonds grew by $5 billion since they “stopped.” This is almost twice the dollar growth of the month before, when they were supposed to be buying. If doubling your growth is “roughly constant” in the BoC’s words, it’s easy to see why they can’t control inflation.
Oxford Economics, a macroeconomic firm, is forecasting a slow rise in rates in Canada. They still see the country’s highly indebted households and their $2.5 trillion in debt feeling a pinch. After rates reach their peak, they estimate households will be paying an extra $236 per month. It might not sound like much, but if diverted from retirement funds at 30, it would lead to a $200k shortfall by the age of 65.
Toronto and Vancouver are big immigration hubs, but they are amongst the worst paying. Our analysis of recent immigration income shows the best and worst cities for income. It turns out the best places are places that struggle to attract immigrants, like Alberta and Newfoundland.
US Real Estate
The US Treasury is cracking down on real estate laundering, declaring it a security risk. The public has received notice that new regulations will come into effect soon. It’s unknown exactly what they’ll be, but the agency said they will focus on areas with poor regulation. One such area is all-cash purchases, which they warn are subject to few checks and balances.