Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
It’s too late for a real estate price crash to make Canada’s largest markets affordable. That’s what Rob Carrick, one of the country’s top personal finance authors, wrote earlier this week. Crunching the numbers, he’s right. Not a big surprise since it’s him, but the numbers are truly mind blowing.
Toronto and Vancouver both now take decades to save a down payment, and double the income to pay the mortgage on a “typical” home. If prices crash 30%, things get more affordable — but they’re still out of reach for most. This is just for a typical home, and not even a detached home. Flight from the city might be a longer trend than most anticipated. Carrick suggests Millennials and Gen Z at least consider other cities and towns, but even a crash won’t fix home prices for most.
One of Canada’s largest banks thinks the government is missing the mark on housing policy. BMO stewed over recent comments from the finance minister, regarding young buyers. If the government thinks this is an issue for first-time buyers, they don’t get it.
The bank says repeating that debt will be cheap for a long time, has Canadians buying homes “like they were buying toilet paper a year ago.” If they do choose to use a policy tool, choosing the wrong one will make this worse. Choose your weapon wisely, because you’re gambling with the whole economy.
Canada’s largest bank warned real estate threatens to destabilize the economy. RBC says the misallocation of capital into real estate has diverted from productive investment. This will undermine long-term growth, presenting bigger future challenges. The bank is urging the policymakers to consider all and every possible tool to cool the market. Even the “sacred cow” of capital gains shouldn’t be skipped. That’s the stage Canada is now at.
The Canadian economy has been much more dependent on household debt than any other economy in the G7. Households in the country spend 12.6% of their income to service debt in Q3 2020. Compared to the US, Canadians spend 65.9% more of their disposable income on maintaining debt.
Canadians also spend 64.6% more than the G7 average, and nearly 3x more than the lowest country. Borrowing future income accelerates near term economic growth. However, it also removes future spending, since more income is used to pay off the debt used. Every point debt servicing rises, is a point of future consumption lost.
The Canadian economy is improving faster than anticipated. This means the BoC can remove the training wheels, and see how far it can go with less help. Earlier this week they announced they will be ending many stimulus programs soon. They will also be tapering QE, along with government spending.
The move influences the cost of debt, reducing the amount of future liquidity. Markets are more than liquid, but the reduction helps bring rates to natural levels. BMO strategists said this was anticipated by markets, meaning the hike was priced in. RBC had said earlier this month they were watching for a reduction in QE in April. If this happens, they see the potential for the BoC to hike rates earlier than anticipated.
The head of the BoC doesn’t see real estate in a bubble, but that’s not how he felt a few years ago. Governor Tiff Macklem was the number two at the BoC in 2013, when he warned about the country’s bubble. He ripped on everything from the amount of GDP devoted to real estate, to affordability. Now with many of those indicators in even worse positions, Macklem has changed his mind.
The change of mind most likely has little to do with his opinion changing. It’s more likely to do with his 2013 warning coming true. He had warned the economy was becoming too reliant on real estate. Now that it’s almost entirely reliant, no one wants to be the person that pops the bubble. Comments like he made in 2013 made today, would put the blame on him. Instead, it’s easier to just ignore the problem and let it turn into a systemic failure. When that happens, they’ll say no one saw it coming. Except Macklem, who warned in 2013, that it was coming.
Canadian real estate markets are now one of the country’s biggest risks, says the IMF. The agency’s staff recommended the country take action to cool its markets. They also warned against helping first-time buyers, which would make the problem worse. By doing so, Canada would not only reinforce higher price points, but also exacerbate inequality.
Canadian household debt to GDP is one of the largest in the world, and one of the fastest growing. Household debt reached 110.4% of GDP in Q3 2020, adding 49.2 points over the past 20 years. Debt grew 80% faster than GDP for two whole decades. The ratio is the highest of any of the G7 countries, and grew at a pace more typical of an emerging economy. Experts believe this leads to small short-term gains, but a long-term drag on growth.
Global Real Estate
New Zealand is moving to curb the tax advantages of property investment. The country revealed a set of measures to make property investment less attractive. By targeting property investors, they hope to push them into productive investment. This would produce more long-term and equitable growth, without feeding on the young. As early as May, they plan on rolling out more measures, with the goal of lowering property prices.
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