Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s built a brand as a welcoming immigration hub but recent immigrants disagree. A new study from Stat Can shows how Canadians of various demographics felt about housing in 2018. They found 2 in 5 recent immigrants are dissatisfied with their housing arrangement. Since then, home prices have increased by 42%, most likely meaning things have become a lot worse. A similar trend is seen with Canadian-born minorities. This results from a long-term wage disparity, since they earn up to 20% less than their Caucasian peers.
Canada’s central bank is calling out the role of investors in driving up home prices. The Bank of Canada (BoC) found investor purchases of real estate doubled in Q2 2021. It was more than twice the rate of growth other buying segments made.
The BoC believes investors are buying only due to returns seen by other investors. This widespread disregard for fundamentals is increasing the odds of a correction. No financial crisis is in the cards if a correction happens but it will slow consumers.
Canadian mortgage debt is rising at one of the fastest rates in over a decade but it’s starting to decelerate. Mortgage debt for housing hit $1.77 trillion in September, up 9.6% ($155 billion) higher than last year. This is a downtick from August’s annualized growth, which has been the highest seen this cycle. A downtick isn’t a trend but analysis of short-term growth shows a dramatic slowdown. This is going to be a tough trend to fight considering recent performance.
Canadian institutions are getting crushed by a “prolonged” period of low interest rates. A Bank of Canada (BoC) survey of financial institutions found 54.6% have seen low rates dampen profits. Since these organizations are banks, insurers, and pensions — this becomes a consumer problem.
In an effort to mitigate low returns, institutions said they’re buying “riskier” assets. They’re doing this because 97% are confident the financial system will handle shock. In other words, taxpayers front the funds to protect their investment. This has the BoC pondering if recent actions have created moral hazard.
Canadian entrepreneurs are dropping out of the market while government employment soars. Self-employed Canadians fell to 2.92 million in October, down 3.8% from last year. It’s now 12.1% lower than the peak reached in September 2019 and fell to its smallest share of employment since the early 1980s. At the same time, we’ve seen the share of government employees rise to 21.8% of the workforce in October. This is the largest share for an October since the early 90s, helping to offset at a macro level. The future of Canada will be fewer entrepreneurs and more government employees.
Canada’s bank regulator is warning it’s the wrong time to loosen regulations. OSFI’s new head shot down weakening mortgage stress tests or lowering down payments. Not only would doing that increase home prices but it also won’t solve any of the issues they’re hoping to resolve. Any benefit would be brief, trading off long-term stability for short-term gains.
Canada’s residential real estate is now worth more than 3x its economy’s annual output. Regulators show homes had an assessed value of $6.1 trillion in 2020, up 2.5% ($146.0 billion) from a year before. Nearly half of the value is in Ontario and a quarter in BC — making up the majority.
The assessed value of all housing is now over 300% of Canada’s GDP. In contrast, US housing is thought to be bubbly and it’s only 170% of GDP. Each dollar of housing value in the US produces 2x GDP output. That’s a lot more bang for their buck.
Canadian real estate is getting more bubbly, says the world’s biggest central bank. The US Federal Reserve exuberance index for Q2 2021 shows Canada is well into a bubble. It’s not clear if Canada had two consecutive bubbles without a correction or one long bubble. It is clear that home buyers are paying irrational premiums and have been for a while. The central bank says once a market is exuberant it will require a correction to return to efficiency. The longer it delays this the bigger the correction will need to be.
New Zealand Real Estate
New Zealand real estate is starting to pull back after rolling out policies that target investors. Over the past year, New Zealand dropped housing investment incentives and lowered leverage. The rate of annual home price growth still remains a lofty 29.9% in October, but that growth is down from the August peak. The country has also hiked its overnight rate twice in the past two months. The double hike should further reduce investor demand.