Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s largest bank feels we are in the middle of a “historic correction.” RBC said the housing downturn is much faster and deeper than expected. Consequently, they’re downgrading their forecast to the deepest correction in history. It’s not all bad news though — the bank says this should be “welcome,” after the past two years. A correction is needed to restore the economy back to efficiency.
BMO doubled-down on calling the supply shortage narrative a “myth.” The bank’s analysis shows new homes outpaced new households for the past two decades. They attribute the shortage to hyper-stimulative demand policies that have driven excessive speculation. This provides further context to the data showing a sudden surge of investors after the rate cuts.
Canadian real estate prices are soaring, and anytime prices soar it attracts investors. Demand from non-resident investors is one of those segments, and it’s been surging over the past few years. Cities have seen up to 1 in 8 newly built homes go to non-resident buyers. It’s hard to argue that such a significant addition of demand wouldn’t be a contributor to home price growth.
Canadian households are doubling down on their real estate luck with more homes. Our analysis shows in 2020 provinces have seen up to 1 in 4 homeowners buy at least a second home. Even more interesting was the growth of homeowners buying their fourth home. It’s occurring at a faster rate than even the rate of growth for owners acquiring a second home.
Canadian mortgage debt reached $2.01 trillion in May, up 10.1% from last year. At the equivalent of 98% of GDP, it’s far past the 70% threshold, which is where it slows economic growth. While it’s begun to slow a little from its peak, it’s still growing much faster than GDP. That means in the coming months, expect it to eclipse and become an even longer-term drag.
Global real estate prices have been soaring but nowhere quite like Canada. The country’s real estate prices are growing at multiples of other G7 countries. Even in the US, where the central bank considers they’re in a bubble, it’s trailing Canada. Somehow Canada’s monetary authority thinks this is nice and stable growth.
Canada’s consumer price index (CPI) hit annual growth of 8.1% in June, the highest rate since 1983. It’s a rate over 4x the central bank’s target rate, clearly showing this has gotten away from them. Canada’s top banks warned it’s far from over, even if it peaks soon. Stable inflation isn’t expected to return for at least a couple of years.
Canada’s oldest bank is challenging the supply shortage, which it calls a “myth.” BMO economists have long maintained that easy credit created a speculative bubble. With bubbles, the price of assets collapse as fast as they rose, as soon as emotions change. As fast as the “shortage” started when rates were cut, hiking them is reversing sentiment.
Canada started construction on slightly fewer homes but it’s still in a building boom. The seasonally adjusted annual rate (SAAR) of starts reached 274,000 units in June, down 1.6% from last year. CMHC’s chief economist reminds the market that while this is down from last year, it remains high. It’s a far higher number of homes than anything seen in the prior decade before 2020. Toronto and Vancouver even bucked the trend, showing increased starts.
Toronto Real Estate
Toronto new homes have seen demand fall off a cliff, especially for pricey segments. In the City of Toronto for example, only two single-family homes sold in May. It’s about a 91% drop from the February frenzy, when everyone thought they were running out of homes. Falling demand is good news for potential buyers though, helping to restore inventory.
US Real Estate
US existing-home sales fell sharply in June, easing pressure on inventory. Sales fell for a fifth month, while months of inventory climbed to the highest in two years. This has had a mixed impact on home prices. Pricier homes in the West have seen prices fall, while the Northeast region is now booming. Expensive markets like the West region, would be more sensitive to rate hikes.
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