Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canadian real estate prices have soared so high, not even a large crash can help. Heck, multiple crashes only bring prices to where concerns were first expressed. We look at various correction and crash scenarios, and what the government said at those levels… then proceeded to do nothing. It’s no longer a Toronto or Vancouver thing, but a national one — yikes!
Canada’s oldest bank sees higher interest rates slowing down home price growth. Over the next year, they see a five-year fixed rate mortgage adding 50 basis points (bps) to the cost. However, variable rate mortgages are expected to rise by 100 bps or more. The Bank of Canada had ignored the bond market’s signals, failing to raise rates. This allowed buyers to shift their costs, and avoid the feeling of tightening. BMO doesn’t see that happening this time, and slowing credit is seen as a drag on price growth.
Canada’s broad money supply (M2++) has been expanding rapidly over the past few months. In October, it reached $4.28 trillion, rising 9.9% from the year before. Since January 2020, the money supply has grown a whopping 22.2% higher. In other words, 1 in 5 dollars in Canada’s broad money supply was created after 2020, and the increase is the size of all money prior to 1996. Bank of Canada research shows a rapid rate of M2++ expansion is linked to high inflation growth for years. After all, the money was created much faster than the economy is capable of growing. At some point it will have to start moving, and flowing into a limited amount of goods.
Canada is in the middle of a supply boom, and seeing the most homes delivered in nearly half a century. New home starts reached 271,000 units, up 21% from a year before — just under the 1976 record. More importantly, this supply is actually reaching the market.
There were 223,000 new homes completed in 2021, the highest number since the early 1970s. BMO stressed how much supply is getting completed with labor and material shortages. Their analysis shows a typical gap between starts and completions is 8,000 new homes. Currently that gap is a whopping 48,000 new homes — six times higher. As supply constraints ease, they see Canada beating the record high in 2022.
Most Canadian businesses see the Bank of Canada as unable to meet its inflation mandate. The central bank’s target rate is 2% annual growth for CPI and 3% at a maximum. In their latest Business Outlook Survey, 67% of respondents see over 3% growth over the next two years. It’s very problematic for businesses to lose confidence in the central bank. This puts the Bank of Canada in the awkward position of having to send a message.
Canadians are sitting on a mountain of savings acquired during the pandemic. Well, some are anyway. Households saved $38.1 billion in Q2 2021, averaging $2,462 per household. The top fifth of households by income represent 115.7% of the net balance of those savings. You know what that means, right? Correct — the bottom two-fifths of households didn’t save anything, reporting negative savings. That’s more commonly known as drawing down savings, or debt.
BCREA, an organization representing BC Realtors, has forecast a drop in home sales. They have forecast the impact of various rate scenarios, with a baseline showing a 20% drop in sales. If the overnight rate made an extreme and unlikely jump to 3.25%, home sales fall by half. In either scenario, the agency doesn’t see a correction of 10% or more.
Canadian mortgage debt has hit an all-time high for 261 consecutive months. The balance of mortgage debt reached $1.93 trillion in November, up 10.4% ($180.6 billion) higher than last year. This isn’t just another record high, but one of the highest rates of growth in over a decade. With the 3-month growth rate showing acceleration as well, the boom is likely to continue. That of course is pending no significant economic shock occurring.
Canadian real estate record price growth is a sign of “too loose” policy, says BMO. The price of a typical home showed annual growth of 26.6% in December. The bank’s research also shows all short-term indicators are accelerating. “…we suspect imminent BoC tightening will take some froth out of the housing market,” wrote one of the bank’s economists.
Canadian real estate prices made another massive leap higher last year. The benchmark price reached $798,200 in December, up 2.1% ($16,700) from the previous month. It’s an astronomical amount of growth for a month, especially for December. As stated above, BMO sees short-term acceleration which may apply more pressure on the Bank of Canada.