Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
The Bank of Canada is embracing fast rising home prices, but that’s not a normal reaction. Especially at this time, in markets with overheated real estate. In France, they’re lowering leverage for buyers, cutting mortgage lengths, and service ratios.
South Korea is going further, looking to limit debt and make speculation unprofitable. The country is even banning mortgages in certain overheated markets.
New Zealand is working together with their central bank, to limit speculation. The government has even openly stated they will be targeting investors.
Monetary policy is often globally linked, injecting cheap money at the same time. However, each country has local issues that need to be addressed differently. Canada embracing higher home prices along with unemployment is a sign it doesn’t have a real economic plan.
BMO is warning about bubble risk, and it’s very different from the alarms others rang in 2017. Back then, BMO believed the foreign buyer “mini bubble” price jump was manageable. Today, if mortgage rates rise, it won’t be.
If rates rise to pre-pandemic levels, real estate affordability hits a “classic bubble.” If rates stay the same, and prices continue to rise, it hits that level next year. All roads lead to unsustainable price levels.
Canadian real estate prices are seeing synchronized growth, often a sign of a bubble. Synchronization risk is when local factors are dismissed, and prices all move together. When this happens, buyers dismiss regional differences. Instead, they often just buy because others are. They feel silly for even thinking about risk prior to seeing their peers thrive.
The problem with synchronized risk is, it makes a whole asset class vulnerable to shock. A single unexpected shock can have a ripple effect across multiple markets at once. You’re no longer worrying about issues in Toronto – it’s the whole country.
The free market does a great job at regulating borrowing risk. Rates rise when the picture is unknown, helping to reduce leverage for borrowers. Rates fall when the economy is booming, helping to increase leverage for borrowers. It’s a simple but effective process that capitalism uses to reduce exposure.
Now what happens when the state decides people should load up on leverage during a downturn? They eliminate the efficiency of markets, and create moral hazard. Buyers now think if they can send home prices higher during a downturn, surely they won’t let the market crash. Assets are now being bid higher, with the belief the state will intervene in any downside.
Capitalism doesn’t exist without risk. Instead, we’ve adopted a system where the state decides who the winners and losers are. Unfortunately, it seems the state picks the same winners every time. It would be great, if people weren’t on the other end of those economic inefficiencies.
Canada is in its 19th quarter of “exuberant” territory, according to the US Federal Reserve. This is when buyers disregard fundamentals, and pay emotional premiums. Fed researches set out to find a “smoking gun” for housing bubbles after the Great Recession. This research is the result of their findings.
Real estate markets are “exuberant” when they have 5 consecutive exuberant quarters. Researchers believe after 5 quarters, the market is inefficient and requires a correction. Canada has done 19 consecutive quarters, or just under 5 years. That’s only 3.5 years if you don’t count the qualifying period. The bubble hasn’t persisted for as long as many think, meaning this hasn’t been a long-term reality. It only feels that way.
Canada’s largest bank thinks rates may rise faster than current BoC guidance. They see the central bank revising forecasts if the economy continues at this rate. A senior economist at the bank said he’s watching for a reduction in QE in April. If the central bank does taper its purchasing, it’s a reduction in ease. A reduction in easing would be a strong sign things are improving faster than they had forecast.
The Bank of Canada made their rate announcement this week, which was widely expected to hold – and it did. Not much of an event, but the notes that accompanied were more interesting. The central bank said they were surprised by real estate demand.
They also reiterated a commitment to flatten the yield curve, to keep cheap money flowing. That might be easier to say than do, considering suppression isn’t effective against inflation driven yields. However, that’s a totally different discussion for another day. Read More
Concerns that you can’t get people to borrow during a recession are out the window in Canada. In fact, households are now borrowing at a faster rate than before the pandemic. Households had $1.65 trillion in residential mortgage debt in Q4 2020, up 7.1% from a year before. The increase is the fastest rate of growth since 2011, smashing exuberance seen in the past 5 years.
Canadian mortgage delinquencies are down almost everywhere in the country. Only six major real estate markets saw an uptick in mortgage delinquencies. Another 26 major markets saw the rate fall. The delinquency rates were widely expected to drop, considering deferrals.
However, things might already be changing in the post deferral world. CIBC’s latest quarterly report was only a month later than the above numbers. The data showed Toronto’s uninsured mortgage delinquency rate was 70% higher. It could be a one off, or it could be a new trend. Who knows, but Big Six banks typically see lower arrears, not higher.
Canada’s work-from-home trend may be forcing some developers to hit pause. Cheap money sent construction investment soaring across the country. Almost all of the growth is in the residential segment though. Despite commercial developers also benefiting from cheap cash, they haven’t scaled much. Clearly, this doesn’t have anything to do with a lack of money. Instead, they’re most likely waiting to see if work-from-home sticks. If it doesn’t, this might actually cause a squeeze in office space.
Vancouver Real Estate
BC’s foreign buyers are down, but the few remaining are looking outside of Vancouver. In January, only 22.63% of non-resident real estate purchases were in Greater Vancouver. To contrast, that number was 60% a year before. Either affordability is impacting those wealthy enough to have second homes, or investors are following locals into more affordable markets.
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