Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canada is running out of land, and it turns out it does this every ten to twenty years — at least in the mind of residents. We dive through newspaper archives to see how often people claim the world’s second largest country has run out of land. It turns out this happens at every land price peak — even in Saskatchewan. Land magically reappears after a crash in home prices. Funny how that works, eh?
Canada’s property bubble has some considering parks a “waste” of expensive land. It turns out this idea is as cyclical as home prices and property development. When prices near a peak, home prices detach from fundamentals. This leads many to think prices will rise forever, disregarding external factors. People forget the quality of life is what attracted people in the first place. Those same people also leave if the quality deteriorates too much.
The Dutch central bank has found low interest rates transfer wealth to the rich. Surprising, right? A study found the top ten percent of households capture a greater share of wealth after rate cuts. Those with more wealth make more, with the one percent capturing an extra 1 to 6 percent of national wealth. The reason is low interest rates inflate asset values, so those with the most see the biggest gains. The researchers warn central banks to consider their role in driving inequality.
The Bank of Canada published a home price exuberance model, and a gem was buried in the footnotes. Staff explained they aren’t using typical fundamentals for the metric. The reason being CPI rents were unreliable, failing to accurately capture the market. The unreliable data is one of the biggest influences on interest rates. It’s unreliable when it shows overvaluation, but reliable to support low interest rates. It’s only right when it supports higher home prices, it would appear.
The Canadian economy is now so dependent on real estate, just commissions and fees are a point of GDP. Real estate commissions and fees saw 79% annual growth in March. It’s now grown so quickly, it hit one percent of GDP — almost double the level last year. Growth in this area was also 7% of annual GDP growth, meaning it’s playing a large part in the “recovery.” At least in a superficial way.
Commercial rents are rising across Canada, as long as it’s not for retail space. Prices made an annual increase of 0.3% in March. Breaking it down, offices (+2.2%), and industrial space (+2.6%) were responsible for all of the gains. Retail space went the other way, falling 2.9% from a year ago. These same themes were seen in Toronto and Vancouver, but with much larger movements.
Homebuyers are paying large premiums to live in Toronto and Vancouver. Toronto home buyers are paying up to 30% more than the national price to own. In Vancouver, the premium rises up to 68% for homeownership, compared to the rest of the country. It’s not a big city thing either, because Montreal is 43% below the national number. Now that remote work is common, this can lead to much more competition from affordable cities.
Canadians went all-in on their house, with renovation spending reaching a record amount. Spending hit $76 billion annualized in Q1 2021, with a typical run rate of $60 billion according to BMO. It’s about 25% higher than usual, and over 3% of the country’s whole GDP. The bank sees a decline over the next few months as people remember what it’s like outside of the home. This can weigh on economic growth, but might be healthier than what’s happening.
Scotiabank cut its worst case risk scenario, and now has a more optimistic outlook. The base case, or if things go as expected, should see home prices rise 7.5% over the next 12 months. The best case forecasts prices rising 9.2%, and the worst case sees 0.4% growth over the same period, respectively. The outlook is much better than just a few months ago. However, there’s a wide gap between Scotiabank’s forecast, and other banks like BMO and RBC.
Canada now devotes more investment capital to housing than business. Residential investment reached 10.3% of GDP in Q1 2021, up more than 2 points in the previous quarter. Business investment fell to 9.3% in the same quarter, meaning the two have now flipped. This is unlikely to last for long, but it shows just how much people are going all-in on housing. Workplaces aren’t needed, the economy is just focusing on warehousing people.
Mortgage originations are the only credit segment to see growth, according to TransUnion. Mortgage originations have increased 25.8% in Q4 2020, compared to a year before. No other segment of credit has seen a rise in account originations. In Canada, if you’re not spending money on a house, what are you even doing?
Canadian residential investment reached the highest level in history… possibly for any advanced economy. Residential investment increased to 10.3% of GDP in Q1 2021, up from 9.3% in the previous quarter. Over one in ten dollars in the economy are now just investments in warehousing people. For context, the US economy peaked at 6.7% in 2006, before their housing crash. Economists say this was one of the biggest warning flags in hindsight.
Canadian home prices increased much faster than rental prices, typically meaning overvaluation. The house price-to-rent ratio for Canada increased 7.7% in Q4 2020, compared to a year before. It’s also 36% higher than it was in 2015, meaning home prices accelerated faster than rental prices. Rent is a fundamental, being closely tied to household incomes. When compared to home prices, it helps to determine if home prices are overvalued… which they are at this level.
Toronto Real Estate
Toronto home prices are seeing growth speed up, even with more supply. The TRREB composite benchmark, aka a typical home, reached $1,045,800 in May, up 2.01% ($20,600) from the month before. The sales to new listings ratio (SNLR) fell to 64.3%, and is now at half the level it was at the peak earlier this year.
The market is twice as well supplied as a few months ago. Home prices are growing even faster, despite the relative improvement in supply. Data shows it usually takes 6 months for the market to realize there’s more inventory.
Vancouver Real Estate
Vancouver home prices are seeing half the growth, as supply improves. The composite benchmark price reached $1,172,800 in May, up 1.5% ($17,332) from the previous month. It’s a big increase, but almost half the size of the one seen a month before. This is most likely due to sales falling faster than new listings, pushing the SNLR to 59.9% for the month. That makes the market balanced, which can remove the incentive for prices to rise quickly.
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