Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian households are unusually dependent on real estate generating their wealth these days. The first quarter of 2021 saw 76.96% of net-worth from increased real estate values. This is the highest rate since 2018, during the mini-bubble in Toronto and Vancouver.
Between 2018 and 2020, typically it represents less than 40% of gains. The median quarterly share since 1990 is only 34%, so the past three quarters above 40% is unusual. Such high concentrations tend to promote further concentration, as FOMO sets in. This becomes a drag on other sectors that draw investment away. It also tends to mean a sector shock causes much more damage, and a rapid loss in wealth.
Canada’s most important real estate book isn’t about fundamentals, but spies and corrupt officials. Sam Cooper’s recently released bestseller, Willful Blindness: How a network of narcos, tycoons and CCP agents infiltrated the West, shows how Canada’s addiction to real estate created a vulnerability. That vulnerability is now being exploited, and no one really cares since they’re all making so much money. You know, unless you’re not making anything. Then it’s just a tragedy that links the opioid crisis to the housing crisis.
Real estate markets will see a massive shift to work from home (WFH), which is here to stay. Both employees and the economy will benefit from WFH, according to NBER researchers. They found fewer commutes and re-optimized workflows mean big gains in productivity. Much of this increase is due to an improved quality of life, as employees regain hours of their week. This is amongst the reasons they found more employers are shifting to WFH models.
The only loser will be large cities that are going to see a big shift. Without workers coming into downtown offices, the spending they did will be relocated. Those dollars spent in the downtown core will shift to the small towns and suburbs that many people relocated to.
A large Canadian financial institution sees affordability cooling the real estate market. Home prices have reached the point where fewer qualified buyers exist. This is reflected in home re-sales over the past few months. At the same time, the higher prices are leading existing owners to consider cashing out.
Fewer buyers and more sellers will cool real estate using market factors. A market cooled by using only behavioral qualities tends to be more unpredictable. This has led the organization to say, don’t discount a market correction.
Canada’s largest bank revised its real estate forecast, due to government inaction. The bank now sees higher home prices and resale growth in 2021, than they expected back in January. A slowdown has been pushed to next year in their opinion. When they originally wrote their forecast, they had expected more government action. The lack of government action will leave real estate to be corrected by market forces. Market driven cooling tends to take longer than policy shock, but also requires a longer recovery.
North American lumber prices have taken a big nose dive since hitting their peak just a few weeks ago. Prices are now down over 26% from a month ago, and down over 29% from the peak hit on May 10th. Costs are still up 200% from last year, but BMO expects it to fall another 60% by next year. That would make prices much cheaper, but not quite at pre-pandemic levels.
The Canadian economy has borrowed so much debt-driven growth, it’ll be a nightmare to get back to the real stuff. Household debt reached 111.6% in the first quarter of 2021, up 8% from the previous year. An increase in the ratio means households are borrowing more credit than GDP is growing by.
Debt is pulling future purchases forward by trading off future cash flows of income. This means growth is borrowed from future productivity. Why the rant about debt? Because Federal Reserve researchers found this leads to long-term economic damage. Every point of household debt to GDP above 70 percent, means long-term GDP drops by 0.3 points. This makes it extremely difficult to keep the economy going without more debt. A debt ponzi works until it doesn’t. The US tried this until it hit 99%, before a massive correction materialized.
Canada diverted more investment into housing than any other OECD country. A lot more. Gross fixed capital formation (GFCF) is a country’s investment into producing goods. Canada spent 37.2% of GFCF on residential investment — building and renovating homes. At the peak of the US housing bubble in 2005, they had reached 28.7% of GFCF on housing. It was considered a reckless concentration into housing.
No other OECD country is even close to the level Canada is at now. It’s a level not usually seen in a developed economy.
North American real estate developers are asking existing buyers for more lumber cash. Despite having already paid for a new home to be built, rising material costs mean they have to spend more. While most developers have tried to absorb rising costs, lumber increased 300%. The increase is, in many cases, larger than the profit they had planned. That additional cost is being passed on to buyers.
Canadian schools will teach 14-year-old kids how to apply for a mortgage this fall. Ontario, the country’s most populated province, is rolling out a new math curriculum. The new curriculum will focus on more “practical” applications, like applying for mortgages.
Not just learning how loans and interest rates work either. The Minister in charge, as well as the new materials, shows the goal is teaching about mortgages. Not amortizing loans, a similar lesson that applies to things like business loans as well. Speculation nation is making choices, and they’re some interesting ones.
Canada has long held some of the top spots on the Economists’ list of Most Liveable Cities. It’s ranked a number of cities for at least 20 years, with Vancouver having held the top spot from 2002 to 2010. Not anymore. Canadian cities fell off the top 10, with Montreal even landing on the list of fastest falling cities. The list is now dominated by Eastern countries, with the exception of Switzerland. Auckland even took the top spot.
While the US didn’t make the Top 10 list, its cities happened to score 70% of the fastest rising list. US cities ranking for growth also happen to be the cities seeing high inflows of millennials. Expensive cities lost a number of people, fleeing to small towns across the US. Those cities are quickly improving, and fast turning into cities with a high quality of life.
Canada is seeing frothy growth everywhere, but nowhere is like Ontario right now. Property prices increased over 30% in all but three of the province’s markets. The median rate of annual growth reached 39.3% in April, with some markets rising upwards of 50%. It is a level of price growth not typically seen in developed nations, and many Canadians are under the impression that it’s normal.
An unusual source is telling consumers to hold off on buying lumber — lumber companies. This week a lumber exec encouraged people to put off discretionary projects. He sees prices falling over the next few weeks. Don’t expect them to fall to pre-pandemic levels though, he warned. This is only 12 months into a 36-month lumber cycle, with elevated demand.
Canada expects pent-up savings to boost new home sales, but it’s not as much money as it may seem. The average net savings per household reached $13,546 in 2020, about $12,389 higher than the previous year. While the $13,456 is a lot of money, home prices have increased by more than this amount per month. Unless we live in a perpetual pandemic, savings are likely to roll back to 2019 levels. It was a windfall, but not a perpetual one.
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