Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Newly issued mortgage debt is going to highly indebted mortgage borrowers. These borrowers represent 21.7% of mortgages issued in Q4 2020, a new record high. It even dwarfed the previous record set in 2016, before the mortgage “stress test” was created. Breaking the trend down, most of the deterioration is occurring with uninsured mortgages, where 22.6% of debt is going to highly indebted borrowers.
Canadian real mortgage debt is being lent at the deepest negative rate since the 1970s. The conventional 5-year fixed rate was 2.45% in June, which works out to -0.6% when adjusted for inflation. An improvement over the -1.2% seen in May, but still a very large negative number. Mortgage cash hasn’t been this cheap in real terms since the 1970s, during the previous inflation crisis. That created a bubble, which popped in the early 1980s, and many tears were shed. A mispriced asset is often repriced to a more fair value once the reason for the mispricing ends.
CIBC is seeing mortgage delinquencies fall across the country, except in Greater Vancouver. The uninsured mortgage delinquency rate fell to 0.23 percent in the second quarter of 2021, down from 0.28 percent last year. Greater Vancouver bucked the trend with a rate increase of 0.24 percent, up from 0.18 percent last year. A falling delinquency rate is expected in a hot market with pandemic deferral and payment backstops. So that makes sense, but it also makes the situation in Greater Vancouver even more puzzling.
The Canadian economy is booming, and well on its way to recovery — and that means less stimulus is needed. Major financial institutions see fixed income market yields climbing in the coming weeks, so we thought we’d use that to project mortgage rates. Under the median forecast, using typical liquidity spreads, the conventional 5-year fixed-rate mortgage has a median forecast of 2.55% in the third quarter of 2021. By next year, this rate jumps well over 3 percent, meaning a lot more interest paid. That is, of course, if Canada continues its swift recovery. A double-dip recession would require much more stimulus and cheap debt. Yes, that’s possible.
Canada isn’t just seeing the amount of highly indebted borrowers on the rise, they also have little equity. Regulators consider households with a loan to income (LTI) ratio of 450 percent or higher to be “overleveraged.” Borrowers with a loan to income ratio of 450 to 550 percent captured 3.66 points more of market share in 2020. Households with a loan to income ratio of 550 to 800 percent gained 2.88 points of mortgage originations. Of those, the majority of the gains were for people with less than 40 percent equity in their homes.
TransUnion released its Credit Industry Indicator (CII) last month. The index shows Canada had a rapid deterioration in health from February to August 2020, with the score falling from 101 to 84 — a decline of 17 points. As of April 2021, the last data point, credit health has barely recovered. Mortgage debt is the only boom segment performing well, with the supply and demand for other credits still far behind pre-pandemic levels.
One of Canada’s “Big Six” is calling out the disconnect between inflation shelter cost data and reality. The CPI-Shelter component saw annual growth of 4.3% in June, the largest print since 2008. As big as that is, it doesn’t quite sound as big as you might have guessed. That’s because one of the biggest components, mortgage interest, has fallen sharply. While everything else is soaring, it’s weighed down by cheaper debt. Cheap debt drives housing costs higher, but makes it more “affordable” if you’re one of the lucky few renewing… which is just a small portion of society.
Earlier last month, we said changes to the CPI basket would result in underreporting inflation. Now we have our first Big Six bank in agreement, the National Bank of Canada (NBC). In a note to institutional clients, the bank’s economists said it was a “mistake” to change CPI measurements to “better reflect” the pandemic. By doing so, they’ll be placing less emphasis on things people didn’t use during the lockdown, such as energy prices. At the same time, they’ll be placing more emphasis on areas where prices are thought to be transitory. The combination will produce chronic under-reporting of inflation as well.
Canadian home building costs made the largest jump on record. Residential construction costs increased 7.5% over just the second quarter of 2021, a sharp acceleration from the previous one. That brought costs 18.8% higher than last year, and even higher in major cities.
Canadian luxury home sales are beginning to cool from scorching hot levels, according to data from a global luxury brokerage. E&V reported inventory over $1 million is much higher in Toronto and Vancouver these days. At the same time, the number of units sold per month has been on the decline. They expect this trend to continue to moderate over the year, bringing it more in line with historic levels.
The IMF has told central banks they should be prepared to act swiftly if inflation isn’t transitory. In their opinion, inflation is expected to moderate as pandemic-driven pricing pressures disappear. Though they warn consumers believing prices will continue to grow, can make higher prices sticky. In the event prices aren’t proving to be transitory, central banks should be prepared to act swiftly.
Toronto Real Estate
Greater Toronto’s new home prices are starting to see the rate of price growth fall. The benchmark price of a single-family home in the region reached $1,405,597 in June, up 23.1% from last year. It’s huge growth, but the rate is a whole point lower than the month before.
Condos are slowing down even faster, with the benchmark falling to $1,058,366 in June, down $5,607 from the previous month. Prices are up 5.9% from last year, significantly slower than detached housing. For those curious, that’s decelerated annual growth. It appears to be the exact opposite trend seen with existing condo apartment prices.
US Real Estate
Foreign investment in US real estate fell to a decade low last year. Non-residents bought $54.4 billion of real estate in the year ending March 2021, down 27% from a year ago. There were 107,000 foreign buyers in the year ending March 2021, down 31% compared to the year before. Both declines are attributed to the pandemic, but they shouldn’t entirely be. The trend for both of those numbers peaked in 2017, and has been consistently on the slide.
US new home sales have been plummeting, helping inventory to get closer to healthy. There were 676,000 new homes sold in June at the seasonally adjusted annual rate (SAAR), down 19.4% from last year. At the same time, inventory climbed to 6.3 months of supply in June, the highest level seen all pandemic, and on the high end of balanced. If it smashes through 7 months of inventory, it would technically turn into a buyer’s market. That’s when prices are expected to fall, or sellers start giving more concessions.
Like this post? Like us on Facebook for the next one in your feed.