Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s banks have a reputation for being some of the most prudent in the world, but it’s tarnishing fast. After going all-in on real estate, they’re now exposed to significant risks ranging from negative amortization to one being discreetly audited for poor leverage control. The regulator has warned repeatedly that issues were getting out of hand, but its lack of transparency has left the public to assume things are fine. They aren’t, and the issues are now boiling over into a systemic risk for the economy.
Canada’s central banks are facing a huge problem in the inflation fight—no one believes them. Interest rates rise to slow credit growth and temper demand, helping prices to slow in growth. The problem is consumers don’t see interest rates as a permanent issue, and consequently haven’t tapered their spending. This has led to rates climbing higher and higher, and they’ll continue to do so until expectations are impacted.
Canadian new home prices made a small increase in May, ending a year-long streak of losses. BMO warns this is just one of many data points that shows shelter is back to driving inflation, and can lead to higher interest rates. The bank feels the data reinforces the most recent hike was needed, and opens the door for further hikes. At least two more are expected.
Canada’s bank regulator, OSFI, is concerned about a potential risk event and has raised the Domestic Stability Buffer, a requirement for banks to set aside money for a rainy day, by 50 basis points to 3.5% of risk weighted assets. This will make borrowing more expensive and reduce the credit supply, as banks are forced to set aside more money. The move was made due to Canada’s high levels of household and corporate debt, as well as increased global uncertainty.
Canadian real estate is currently experiencing a brief upswing in both prices and sales. Oxford Economics warns clients this is a temporary surge and the correction in real estate prices is far from over. They expect home prices to drop 10% by early next year and a 20-25% peak-to-trough decline from the February 2022 high.