Time for your sheet on this week’s top stories.
Canadian Real Estate
Exuberant Canadian home buyers have pushed real estate into a bubble — again. The US Federal Reserve’s Exuberance Index shows Canada completed 5 exuberant quarters. This is enough to be declared an exuberant market, also known as a bubble.
The previous bubble is only separated by one quarter, which only came in a hair below exuberant. Without sufficient time to correct, it might be just one long, 6-year-old bubble, or a “double bubble,” after completing two bubbles before a correction. Either way, prices have drifted above fundamentals for 6 years. The longer they do this, the further disconnected prices become from reality. The further disconnected, the bigger the correction needed.
Politicians are promising to make housing affordable, but none of their plans do that. That’s the general take from Canada’s top economists, who say the promised platforms will boost prices. All parties plan to increase subsidies and lift demand. The majority of economists say this does the opposite of creating affordability. Many of these strategies are typically used to boost prices after a recession.
Canadian household debt is rising at a rapid rate — much faster than income. Household credit market debt to disposable income reached 173.08% in Q2 2021. Annual growth is up 8.61%, the largest increase going back to at least the 90s. Government transfers like CERB had temporarily boosted income in the previous quarters. As those transfers fade, so will disposable income.
Canadian debt will be cheap for a long time, but it won’t be this cheap. Government spending pushed long-term debt to 50% of GDP. This was supported by central bank purchasing, pushing rates below 2%. As the central bank eases its purchasing, interest rates should rise. Tapering stimulus will increase borrowing costs, even without an overnight rate hike.
Canada’s largest bank just bought half of a real estate investment portfolio from a pension. An RBC fund bought 50% of a billion-dollar portfolio held by Quadreal. The latter company is the real estate division of BC’s public sector pension union. Central banks pushing rates below inflation have sent investors looking for better yields. This yield chase has flooded institutional real estate investors with cash. Expect this trend to get a lot bigger if rates “fail” to rise.
The Canadian economy’s recovery is slowing, potentially meaning longer stimulus. RBC expects quantitative ease to taper soon, but the risk of it being delayed is rising. They found the market is now pricing in less than two full rate hikes next year. That’s not a sign of confidence in a recovery. It’s a sign of unexpected weakness in the future.
The Liberal Party of Canada has made a lot of promises for housing affordability. In summary, it includes a number of demand inducement schemes. By creating more demand, you are technically putting pressure on prices to rise.
To handle a demand problem they’ll create, they plan to subsidize more supply creation. The parliamentary budget officer failed to find a similar subsidy plan created supply. Doubling down on this effort after failing to find it works is a bold decision.
There are some great transparency measures in the plan. They promise to criminalize blind bidding, as well as make home price history public. The industry finds the two plans controversial, and are largely opposed. However, they’re common in other advanced economies.
Greater Toronto and Vancouver home prices are seeing price growth deceleration. Both Greater regions saw the annual rate of price growth decelerate last month. It was widely expected after growth peaked a few months ago.
It’s worth noting that the month’s decline was smaller than the previous month. Elections tend to put a bump in the market, and make it pause. The trend is still towards deceleration, but it may experience a hiccup in September.
Canadian households have been saving a lot, but a deeper dive into the data shows it was largely just the rich. The lowest quintile (bottom fifths) of household incomes didn’t save anything. They were net borrowers, with a savings rate of -61.4% in 2020. The quintile above them also had a negative savings rate as well. More than 40% of households didn’t save anything during the much-hyped “savings boom.” Nearly 90% of savings were in the top 20% of households.
Canadian real estate investment hit a new record high last quarter. The seasonally adjusted annual rate (SAAR) of investment reached $249.3 billion in Q2 2021. This is 0.59% higher than the previous quarter. It was a new all-time record high.
The SAAR trend actually minimizes growth, as we can see by isolating just the quarter. Unadjusted residential investment for the second quarter was $67.9 billion. This is up 25% from the previous quarter, and a record high. Seasonal adjustments are flattening the quarter’s data significantly.
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