Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canadian real estate prices are growing even faster than during the late ‘80s bubble. Annual growth reached 28% in January 2022, with prices rising a whopping 46.4% over the past two years. Emerging global economic powerhouses aren’t the cities driving this record-shattering growth, but small cities. Canada’s oldest bank is asking investors to consider, is it more likely every small town suffered an inventory shortage at the same time? Or did the madness of the crowd take over, and buyer’s have become exuberant?
Canada’s parliamentary budget officer is warning politicians that housing is severely overvalued. They estimate Toronto, Hamilton, Halifax, and Ottawa were over 50% overvalued. Vancouver, Montréal, and Victoria were between 30% and 45% overvalued. As households stretch budgets to buy, they warn households will become more vulnerable.
Canadian condos are often overvalued due to their reserve fund balances. The Canadian Institute of Actuaries released a massive 140-page study of condo reserve funds and regulations. What they found is a number have insufficient cash to handle future large maintenance costs. By deferring saving for a rainy day, buyers might be hit with a massive bill to make up for the lack of prudence. This will have a sudden and dramatic impact on the valuation of a building, so double-check the reserves when buying.
Canada’s yield curve is flattening, and that’s bad news for forecasts. The gap between the government 10- and 2-year bonds fell to just 37.6 basis points on Feb 14. This is down from 93.1 bps a year ago, and 130.6 bps at the cycle’s peak when rates most likely should have been raised. As interest rates rise to cool inflation, they risk inverting and the gap turns negative. If that occurs, expectations are as good as it gets and a recession is on the horizon.
Canada’s building boom is forecast to slow down this year after hitting a near-record. Desjardins is forecast to see new home starts fall to 225,100 in 2022, down 17.0% from last year. They also forecast another 4.7% drop in 2023 on top of this year’s drop. A combination of higher rates and the recent building boom should satisfy demand.
Canada’s gross domestic product (GDP) is less impressive when adjusted for population. Real GDP per capita peaked in Q2 2019, a whole two quarters before aggregate GDP. The current level of GDP is more than double the drop from peak, when adjusting to a per capita basis. The economy isn’t growing so much as it’s just adding more economic units (people).
Canada’s inflation has hit a 30-year high, and it’s getting stickier. The consumer price index (CPI) came in at 5.1% in January, a sharp climb for annual growth from 4.8% a month before. Over 83% of the 18 major categories are now growing above the target annual rate. As inflation spreads to more components, it gets even more difficult to cool it down.
Canada’s vacant home problem is improving, but it still has over 1.3 million of them. The latest Census found 1.31 million vacant homes in 2021, down 2.62% five years ago. This is roughly 8.0% of the country’s housing stock, down from 8.7% in the previous report. Vancouver’s vacant home tax appears to be a winner, lowering the city’s units dramatically over such a short period. Toronto, on the other hand, has seen the number of units soar since Vancouver’s tax.
Canadian real estate prices have never been higher or grown faster. The cost of a typical home hit $825,800 in January, up 3.69% ($29,400) from a month earlier. Compared to the same month last year, prices are 28.01% ($180,700) higher. Annual growth has cleared a new record high for benchmark prices. Remember, this isn’t just for one or two markets but the price of a home across the country.
Canada’s largest bank took a dive into Census 2021 data and found “resort towns” had the largest population growth. From 2016 to 2021, the top three growth markets are Squamish (21.8%), Wasaga Beach (20.3%), and Tillsonburg (17.3%). Small numbers are easier to grow, so the high rates aren’t shocking. It’s still a mind-blowing amount if you think about it. Close to 1 in 5 people in these three cities didn’t live in those regions just five years prior.