Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Bloomberg ranked the world’s largest real estate bubbles, with Canada taking second spot. Topping the list was New Zealand (#1), Canada (#2), and Sweden (#3). The UK (#5) and the US (#7) also managed to rank in the top ten. It seems like everything is in a bubble, but that’s not quite the case. The gap between #1 and #2 is minimal, but the gap between #2 and #5 is massive. It gets a lot more bubbly at the top, real fast.
Canada is seeing the rental curve flatten, another sign of a real estate bubble. Within 5 km of downtown Toronto, the average price made an annual decline of 12.05% in May. As you get further from the city center, rental prices increased more and more. Falling prices close to amenities and soaring prices further away, means a “flattening.” This is typical of a bubble, where people are more worried about securing a place than where it’s located. It’s especially problematic in cities with rising vacancies.
Canadian real estate buyers are dropping out of the market faster than sellers. The seasonally adjusted SNLR fell to 75.4 percent in May, down 0.8 points from the previous month. It was the fourth consecutive month to see the ratio slip, which is now down 15.4 points from the January high. The market isn’t balanced yet, but it’s nowhere near as tight as it was earlier this year. As the economy reopens, this ratio is expected to fall even further.
A new Zillow survey found 1 in 4 Canadian home sellers aren’t selling because they can’t afford to upgrade. This is called homebuyer’s gridlock — people who own a starter home can’t afford to jump to a mid-tier one. This has a ripple effect right up the chain, causing fewer people to move than would be normally expected.
If the starter homes are never freed up, first-time buyers can’t get into the market. Now the whole housing market is inefficiently allocated. That’s exactly what Canadian real estate looks like, and the survey confirmed the suspicion. Ironically higher prices are causing fewer people to move, squeezing inventory.
The number of Canadians asking, “should I buy a house” is bouncing higher this month. Data from Google shows the term had an index score of 59 for popularity in June, up from the 33 seen in May. When the index hits 100, it means search activity has reached a “breakout,” or all-time high. Historically an increase in popularity occurs at the peak of home sales.
Canadian household debt reached a new record high, and it’s growing at the fastest rate in years. The outstanding balance reached $2.48 trillion in April, 5.34% (+$125.89 billion) higher than the same month last year. It was the highest rate of annual growth for household credit since 2017. It was driven almost exclusively by mortgages.
Canada’s national statistics agency says the diverging employment trends are easily explained. Payroll employment increased 167,000 (+1.0%) in April, despite renewed lockdowns. Labour Force Survey (LFS) employment shows a loss of 207,000 jobs for the same period. The two indicators appear to show the opposite, but Stat Can says payroll lags.
The agency explained away the issue by saying payroll data lags the LFS. It typically takes an extra month for LFS changes to catch up with payrolls. Sounds totally logical, except for one thing — it hasn’t happened before. BMO economists crunched the numbers, and failed to find precedent for this explanation.
New housing demand is expected to taper well into next year, according to RBC — the country’s largest bank. The seasonally adjusted annual rate (SAAR) of housing starts reached 305,000 in Q1 2021, up 47.34% from a year ago. The bank has forecast this number will drop to 258,000 by Q2 2021, down 15.40% from just a quarter before. RBC sees declines continue until Q3 of next year, when they’ll finally bottom. At which point housing starts will begin to climb again.
Canadian home renovation loans made a sharp drop, falling to 2013 balance levels. Renovation loans fell to $2.87 billion in the first quarter of 2021, down 2.74% from the same quarter a year before. The decline in activity is typical of a market that has just passed peak, or has become bubbly. After all, why renovate a home when people will pay a premium regardless of whether you do?
Lumber prices continue to spiral lower from the peak reached just over a year ago. Prices for SPF closed at US$926.50/mbf on June 21, down 7.0% from last week. That brings the cost 41% lower than the same day a month ago and 45% lower than the peak 45 days ago. Technically, this is a crash. Experts still see these prices falling even further from here though
Canadian new home prices are rising very quickly. Prices made a monthly increase of 1.4% in May, bringing the annual change 11.3% higher. It was the largest annual increase for new home prices since November 2006. Huge, but half the rate of price growth existing homes have seen. Real estate is extremely frothy these days.
The end of pandemic income supports has many worried, but not the National Bank of Canada. According to their research, disposable income excluding government support is at the trendline. It’s now exactly where it would have been without a pandemic, and the economy is just humming along.
Of course, unemployment is still elevated, so the distribution is totally different. Fine if you’re looking at the macroeconomics of the situation, but disturbing if you break it down.
Residential housing investment is forecast to make a sharp drop, according to Desjardins. The second quarter is forecast to see a 25.1% decline in annualized growth. It’s expected to continue into Q3 (-3.3%), and Q4 (-4.6%). Falling activity will taper the full-year growth by a lot. This is in line with the narrative of falling new home starts over the next few years.
More Canadian uninsured mortgage borrowers are opting for variable rates. Typically fixed-rate mortgages with 5-year terms or longer are the most popular choice. Lenders only extended $12.8 billion of those in April, down 22.6% from a month before. Variable-rate mortgages extended came in at $16.2 billion, up 23.6% from the month before. More people are opting for a variable rate, which means a bet on interest rates not rising. If they’re wrong, they can end up paying a lot more in interest.
Canadian job vacancies hit a new record, even with elevated unemployment. The first quarter of 2021 had 600,000 unfilled jobs, once seasonally adjusted. BMO estimates this is enough unfilled jobs for 2.5% of the working-age population (between 15 and 64). It’s a lot of jobs to fill, especially with pandemic income supports allowing workers to avoid low pay. That appears to be changing, as Canada tapers pandemic supports to more uncomfortable levels.
US Real Estate
US new home sales fell to the lowest level in a year, relieving some pressure on housing inventory. The seasonally adjusted annual rate (SAAR) of home sales came in at 769,000 for May, down 5.9% from the month before. Reduced demand for home sales pushed the months of inventory up to 5.1 months of supply. This is the fewest home sales since May of last year, and the most inventory since the same month as well.
US existing home sales also took a dip last month, helping to relieve pressure on tight supply. The seasonally adjusted annual rate (SAAR) of sales reached 5.8 million in May, down 0.9% from the month before. This helped to push the months of inventory to 2.5, up from 2.4 in April. It was the fourth month existing-homes sales fell, and a 7-month high for the months of inventory. Market conditions are relaxing as the economy reopens.
The real estate boom in the US has attracted more people looking to be a part of it, but it may be getting crowded. NAR said the number of Realtor members reached 1.5 million in May, up 8.75% from last year. That’s the fastest rate of growth since 2006.
It’s a little hard to appreciate how big this number is without context. That means 1 in 75 working-age adults are registered Realtors in the US. There are 1.11 Realtors per home on the market for sale. Considering high-performing agents often sell more than one, that’s a tough gig. Good luck to them all.
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