Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Macroeconomics firm Oxford Economics warned clients that Canada’s recession is here. They believe home prices will fall 30% from peak-to-trough by next year, wiping out most growth. Most stimulus would undermine the central bank’s attempt to curb high inflation, so don’t count on the money printer going brrr.
Canadian mortgage borrowers are opting for variable rate mortgages at an unusual rate. Nearly 2 in 5 (39.8%) of uninsured mortgage debt had a variable interest rate in September. It’s a big jump from just 19.1% in March 2020, as households and investors tried to get the cheapest rate possible. Now that’s proving to be a mistake, as their variable interest costs rise at one of the fastest rates ever.
Many Canadian home buyers that bought at the peak of the bubble are now underwater. The price of a typical home fell to $735,400 in October, down 15.3% (-$132,900) from the peak reached in March 2022. A typical buyer in this scenario with the minimum downpayment would now be 9.7% ($71,100) underwater. That means not only is there downpayment gone, but they would have to top up to get to zero. Less of a concern for long-term owners, but investors with shorter timelines might feel different.
The Bank of Canada is warning that restoring financial stability won’t be pain-free. The central bank’s deputy governor warned this week, that aggressive action is needed. Interest rates will have to rise sharply to curb excess inflation. This will most certainly mean lower home prices, but it’s the least risky path to stability.
After nearly hitting the size of Canada’s GDP, mortgage debt is grinding to a halt. The outstanding balance reached $2.1 trillion in September, up 0.3% ($6.4 billion) in the month. The growth made it the slowest September in nearly a decade, as high rates eroded buying power. Now that it’s reached such a large size, it’s hard not to see it becoming a drag on the economy.