Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Oxford Economics just warned clients that home prices are in for a correction. The global forecasting firm sees Canadian home prices falling 24% by mid-2024. Previously they expected a smaller drop, but the correction required increases with prices. If home prices continue to climb, they’re forecasting a 40% decline and financial crisis.
Canadian real estate is long past the point where a little more supply can fix prices. That was the take from BMO, as annual home price growth reached 29% in February. New homes are seeing starts and completions at record levels. Prices aren’t slowing down though, not even a little. Annual growth has almost doubled since the sudden inflow of supply. Without controlling demand, no amount of supply will be enough for investors.
Canadian existing-home buyers are dropping out of the market faster than sellers. This has led to a dramatic improvement in the sales to new listings ratio, which fell to 75.2% in February. The ratio has seen a 13.7 point drop from the month before and is the lowest since September 2021. That was back when prices first began their second wave of price growth increases. It was also a broad trend, with 22 out of 27 major markets seeing improvements.
Canadian real estate prices are surging higher — but so are home prices in Australia. And the Netherlands… as well as the US. Most economies with Western-style monetary and fiscal policies have seen prices surge. That’s not a coincidence, it’s a sign of easy monetary policy according to BMO.
Canadian households used some of their excess savings in 2020 to pay down their debt. It looked like they were suddenly worried about leverage, but that disappeared fast. The debt to income ratio reached 186.3% in Q4 2021, meaning they owed $1.86 for every $1 of disposable income they earned. It doesn’t just reverse the progress they made, it pushes debt levels to a new high.
Canada’s inflation is surging like it hasn’t in decades, with the cost of shelter driving the trend higher. The consumer price index (CPI) saw annual growth of 5.7% in February, the highest level of growth since 1991. Shelter was a major contributor to the trend, rising at the fastest rate since 1983. Further complicating the issue is broadening inflation, spreading across categories. Once this occurs, high growth becomes more stubborn and difficult to control.
Canadian real estate affordability is about to surpass Canada’s worst bubble. BMO estimates the average mortgage rate is just off a historic low at 1.9% and expects this rate to rise sharply. Modeling a lower-than-expected rise, buyers will pay a record share of income. Not in Toronto or Vancouver, but at the national level. All but the country’s wealthiest households will be able to buy at this level. This is expected to create downward pressure on prices.
Canadian bond yields are ripping higher and mortgages are expected to follow. At the time of writing, the 5-year Government bond yield increased 0.38 points over 5 days. Since last year, yields have increased almost a full point from close to record lows. The 5-year Government bond strongly influences 5-year fixed rate mortgages. Variable rates, impacted by the overnight rate, are also set to rise as well. Good-bye cheap money, you’ll be missed. By some.
Canadian real estate prices are rising at one of the fastest rates in history. The benchmark price for a typical home across the country hit $869,300 in February, up 29.2% from a month before. Since the BoC cut interest rates, home prices have increased $296,000. Yup, nearly the cost of a whole house in the United States.
New vehicle sales climbed for the first time since 2017 in Canada, primarily due to a rise in light trucks. There were 1.6 million vehicles sold in 2021, up 0.9% from the year before. The climb is almost entirely attributed to the chip shortage last year. New vehicle sales are still below 2019 levels, and were tapering before 2020. This is very different from the US, where vehicle demand has been surging.
Canada’s central bank waited too long, and now they’re behind the curve. Scotiabank now sees much higher interest, hitting 2.5% by the end of 2022. Another 0.5 point increase is seen in the first quarter of next year. The forecast is calling the highest interest rates since before the Great Recession. An aggressive forecast to cool inflation that’s at the highest level since the 90s.
Canada’s building investment growth disappears after Stat Can adjusts it for inflation. Real inflation growth fell 9.7% in January, according to the agency. This reverses a mild gain seen using nominal price data. Aggressive inflation is eroding the impact of substantial investment. Consequently, a lot more money is going less far when it comes to building.
US Real Estate
The US Federal Reserve made its first interest rate hike since 2018 this week. According to the committee in charge, the 0.25 point hike is the first of six this year. By year end they see the Federal Funds rate hitting 1.75%, and will rise even further next year. The aggressive moves are an attempt to cool inflation which is now at a 40-year high.