Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian real estate is seriously overpriced — with cities up to 108% overvalued. Moody’s Analytics estimates urban cities are 22.9% overvalued as of Q4 2021. Toronto (43.6%) and Vancouver (22.3%) also have steep overvaluations, as one might guess. About 4 in 5 cities are now overvalued according to the model.
Canadian real estate prices increased much faster than incomes, and it’s getting worse. Home prices climbed 2.77x faster than household incomes since 2005. That would already create a systemic gap impacting a generation, but the gap is expanding. Over the past year, home prices have grown 10.5x faster than incomes. At this pace, a whole generation will see a milestone delayed by decades. The cost of shelter will soon become a big weight on the economy, diverting funds from other areas.
The Great Canadian Mortgage Debt Binge continues but signs of moderation can be seen. Outstanding residential mortgage credit reached $1.96 trillion in February. This was an increase of 10.7% ($190.6 billion) from last year. It’s worth noting that February growth was $600 million smaller than January. Typically things get hotter going into the Spring market, not cool down.
Higher interest and soaring inflation is a “game changer” for Canadian real estate. That’s what RBC said, as it lowered its forecast for existing-home sales by 13% in 2022. Another 14% decline is expected in 2023, since this isn’t a short-term issue. Not even RBC saw the central bank acting so late on inflation that it would hit multi-generational high.
A large Canadian brokerage made headlines earlier this week, with its bullish forecast. They’re calling a 15% increase for home prices, which sounds astronomical in this environment. BMO was quick to call out the catch — the number is lower than today’s price. The brokerage sees a drop in prices, in line with expectations of higher rates. Even the country’s biggest bulls don’t see performance in this environment.
Canada’s bank regulator sees international banking changes limiting housing market risk. Starting next year, investor mortgages will see their risk-weight rise. These mortgages will be considered 50% more risky than owner-occupied homes. OSFI said this will lower the leverage investors have, mitigating financial system risks.
Scotiabank thinks the Bank of Canada should raise rates by 1 point at the next meeting. The hike would be 4x the usual size of hike, but a 31-year high for inflation might justify it. With changes to CPI next month, Scotiabank forecasts inflation will reach the highest level since the early 80s. “Should” doesn’t mean they will though, with the bank’s economists citing a slower path is likely. However, don’t discount it — later in the week the Governor said an 0.75 point hike might be on the table.
Canadian inflation just hit the highest rate of growth in over three decades. Annual growth was reported at 6.7% in March, up 1 point from a month before. It was the largest growth since 1991 and not expected to moderate anytime soon. Experts weighed in, feeling this reinforces the need for much higher interest rates. That means much more aggressive policy than anyone saw just a year ago.
Canadian passports are no longer the prized possession they once were for entrepreneurs and the rich. The Nomad Capitalist Passport Index for 2022 shows Canada fell to 26th place, down from the 23rd spot a year before. Just 5 years ago, Canada was climbing the index hitting the 14th spot. What changed? Nothing, and that’s the problem. The rest of the world is just getting much more competitive for this class of job makers.
Canadian real estate prices showed abrupt price growth deceleration, another atypical sign going into Spring. The annual rate of growth slowed to 26.9% in March, down from 29.1% the month prior. While this is still a very high rate of growth, things normally heat up into the Spring, not cool down. Rate hikes have barely even begun to reach the market, but the psychological impact is already here.
Worried about how recent rate hikes will impact homeowners and the economy? Don’t be, because low rates have helped to drive rents soaring even higher than mortgages. Credit bureau data shows the average monthly mortgage payment reached $1,390 in Q4 2021, a fairly steep climb over the past few years. Rents have climbed even more substantially though, with an average 1-bedroom apartment hitting $1,473 per month, and 2-bedrooms hitting $1,820 per month. Before even adjusting for the size of the average owned dwelling, it’s apparent a low rate subsidy for home owners is being dumped on renters.