Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian real GDP contracted in the most recent data, partially due to a housing drag. Real GDP dropped 0.1% in July, following a 0.6% increase in June. The country is now just 2 points below pre-pandemic levels, but real estate is now a much bigger part of the economy. Now with home sales stalling, it has begun to undermine the recovery. Real estate rental and leasing, as well as construction, was a notable contributor to the GDP drag.
Global bond yields are surging higher, and Canada’s markets are moving with them. The GoC 5-year bond reached 1.11% last week, about 30 basis points (bps) higher than a month before. This should push 5-year fixed mortgages up a similar rate. One bank, which had cut this rate just two weeks ago, has already hiked to reverse the move.
Canadian homeowners are borrowing an epic share of their home equity. Home equity line of credit (HELOC) debt reached $226.6 billion in July, up 4.2% ($10.73 billion) from a year ago. The rate of growth is now the highest since 2019, a sharp recovery from last year when it barely moved. Soaring home values and cheap debt are a heck of an incentive to borrow equity. Tapping too much equity can make borrowers vulnerable to shock or climbing rates.
Canada and the United States are seeing elevated inflation, especially for G7 countries. The US has seen 5.1% annual growth for its CPI in August, the highest of any of the advanced economies. Canada followed with 4.1% growth over the same period, the second-highest. Despite the news bias towards elevated inflation, this isn’t a global story. Some advanced economies in the group are even fighting off deflation.
Canada is running low on non-permanent residents, and it’s creating a labor squeeze. At the beginning of the pandemic, Canada had seen a net outflow of non-permanent residents. This meant more people were leaving than arriving. The trend has since reversed, but still has a long way to go before getting back to pre-pandemic levels. In the meantime, the economy is seeing vacant jobs soar. BMO suggests this is likely to persist until immigration picks up, or wages rise to attract domestic labor.
Canadians haven’t ditched their province in such large volumes over three decades. Interprovincial migration hit 123,500 people in Q2 2021, up 55.1% from the previous quarter. It was the largest increase since Q3 1991, smack in the middle of the last affordability crisis. Ontario is the big loser here, with the largest net loss of any province — by a country mile. People haven’t fled the province in such large numbers since the 1980s.
BMO is warning people to strap in because mortgage rates are about to take off. Citing rising bond yields as the reason, the bank expects fixed mortgage rates to rise. While they say locking in a mortgage rate is a personal thing, this might be the optimal time to lock in low rates. That is… if Canada doesn’t sink into a double-dip recession.
Canada’s national housing agency is putting the whole country on red alert. The CMHC rated the country as “highly vulnerable” this week. The call was made after noting persistent overvaluation and price acceleration imbalances. This is the first time they’ve labeled the whole country at risk since the pandemic began.
US Real Estate
US existing-home prices are rising very quickly, but total gains still look modest. Unadjusted prices showed annual growth of 19.7% in July, smashing the record set a month before. These are huge gains, but the index has only made modest annual gains since 2006. If you bought at the peak, you didn’t make all that much — just a little better than inflation. If you bought after the crash though, the typical home is now worth double.
Global Real Estate
New Zealand is eliminating another incentive for property investors — a tax break. Previously property investors could deduct mortgage interest from their taxes. By eliminating this incentive, they’re hoping to level the playing field between investments. The move is the latest in a string of moves to deter property speculation and drive prices lower. The Government of New Zealand says they’ve so far seen early signs of it being a success.
The majority of Berlin residents just voted to expropriate homes from large landlords. Passing in a non-binding referendum, landlords with over 3,000 units would see their assets transferred to the state. The issue isn’t a done deal though, with compensation being a major sticking point.
Housing activists argue compensation should be based on a multiple of rents, like traditional metrics. The senate, however, used more frothy “market rents” to calculate the potential cost. If the latter is used, it would undermine the win. If the former wins, it shocks the market back into affordability.
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