Time For your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian real estate bubble sentiment is collapsing but remains frothy. A US Federal Reserve model shows Q3 2021 was the 26th quarter the market showed exuberance. That means the market has been in a bubble for 6.5 years, but exuberance is starting to fade. In the latest quarter, the index shows exuberance is past its peak, meaning the run might be coming to an end.
New mortgage lending across Canada has taken a sudden nosedive. Lenders created $38.8 billion in new loans in December, a drop of 18.7% from a year before. The decline was across insured and uninsured debt, similar to the trend in the United States. The drop is likely due to a sudden rise in fixed-term lending costs, lowering incentive to borrow.
Canadian new home construction is slowing and forecasts show this is expected. The seasonally adjusted annual rate (SAAR) of new home starts fell to 230,754 units in January. It was 3% lower than last year, but 6% lower than forecast expectations. There’s a lot of building, with units exceeding pre-pandemic levels. However, higher interest rates and the recent surge has been forecast to slow demand.
Growth of mortgage debt in Canada is slowing after reaching a massive number. Mortgage debt reached $1.94 trillion in December, 10.4% ($182.2 billion) higher than last year. Statistics Canada noted they observed slowing growth. That tends to happen when mortgage debt reaches 96% of GDP.
Canadian real estate prices aren’t slowing with the threat of higher rates — they’re rising faster. The benchmark price was $825,800 in January, up 3.7% ($29,400) from a month before. Some cities like Oakville saw prices rise as much as 8.5% ($128,200) over the same period. About 78% of home price indices show gains of at least $20,000 in just one month — lofty for where wages sit in the country.
The Canadian job market is tightening but having a minimal impact on wage growth. There were 896,000 job vacancies in December, up 87.9% (419,280 jobs) from a year before. At the same time, unemployment hit the lowest rate since December 2019. The combination of the two factors should lead to high wage growth, but it isn’t. Annual growth for wages was only 1.7%, lower than inflation — never mind a competitive number.
The Ukraine conflict isn’t expected to change the path central banks are on. BMO estimates inflation is driven 0.4 points higher for every $10 increase WTI crude oil makes. Even before the conflict began, inflation had yet to fully price in higher oil. The conflict is expected to push prices even higher, furthering the need for higher rates.
Soaring real estate demand is driving record revenues for Canada’s real estate industry. Gross revenues for agents and brokers topped $17.3 billion in 2020, up 11.4% from a year before. Profit margins even expanded, rising to 32.5% in 2020, up from 30.2% in the previous year. Stat Can expects the record to be beaten in 2021, as preliminary data shows even higher sales volumes. The revenue is likely to be reeled in by the end of 2022, as higher rates moderate sales.
Ontario rental evictions plummeted during public health restrictions, but they may normalize soon. The province received 32,514 filings from April to December of 2021. This is 8% lower than the previous twelve month period, but it’s only nine of the months recorded. Failing another public health measure by next month, these numbers should beat. Typically we see double the current levels, which means normalization will see many more evictions.
Canadian businesses have more employees working from home… in another province. About 113,000 employees working from home will do so in another province from the one they’re employed in. This is a whopping 797% higher than last recorded in the 2016 Census. The trend can have a big impact on cities that justified prices largely by proximity to high paid jobs.
Canadian inflation has been revised even higher as commodity prices rise. BMO expects 4.7% annual growth for 2022 CPI, up from 4.5% in the previous forecast. Most of the increase is due to high inflation that has persisted longer than thought. High commodity prices tend to trickle into the economy for a while, meaning much more inflation is coming.
A study from Canada’s national statistics agency shows race plays a huge role in how much people get paid. Depending on the size of employer and race, being a visible minority can take home up to 30% less. The racial disparity gap was lower for women than men, but women also started with lower pay in general.
US Real Estate
US real estate spent another quarter in a bubble, according to their central bank models. The Q3 2021 exuberance indicator marked the sixth consecutive month in a bubble. It now makes more sense why Fed Presidents were warning people of a bubble right around this period. They literally had data showing them one was occurring.
US mortgage applications are falling rapidly due to higher interest rates. The unadjusted mortgage application index for the week of Feb 18 showed a 6% annual drop. Refinancing in particular took a big hit, falling 56% over the same period. The industry attributes this to higher mortgage costs, which have rapidly climbed off record lows.