Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada has the most significant gap between real estate prices and incomes in the G7. The price to income ratio reached 164.8 in Q2 2021, up 19.8% from five years prior. In contrast, the US is at 94.2 — it’s more affordable than it was back in 2005. The gap in Canada has grown more than 50% larger than in the US in less than two decades.
A Big Three ratings agency sees higher home prices across Canada next year — and lower incomes. Fitch Ratings has forecast disposable incomes will fall over the next two years. The drop in income will weigh on home prices, but not enough to prevent them from rising. Home prices are still growing at half the rate of the past year, which is still a big climb.
According to the country’s oldest bank, Canadian real estate doesn’t have a supply problem; it has a demand issue. Over 300,000 starts in November, housing completions at record highs, and robust new listings. All factors that indicate there’s a lot of inventory, buyers are just scooping it all. There’s no way to satisfy the demand stimulated by excessively low interest rates. The bank had previously said the shortage ends as soon as the Bank of Canada wants it to end.
Canada’s population just saw one of the biggest jumps in population growth. The estimated population hit 38.44 million in Q4 2021, up 0.5% (190,339) from the previous quarter. Annual growth has reached an estimated 1.1% (403,433) people. Quarterly growth was the second biggest ever recorded. Most growth was concentrated in BC and Ontario, representing 65% of the total increase.
Canada’s debt-heavy economy is projected to see slow growth going forward. The OECD has forecast potential real GDP per capita will reach just 0.7 percent per annum from 2020 to 2030. Between 2030 and 2060, the organization has forecast growth of 0.8 percent per annum. Before this, Canadian economic growth had been close to the top of G7 economic growth. For the next 40 years, it’s forecast to be at the bottom of not just the G7 but all OECD advanced economies.
Canadian home sales are booming as cheap mortgage debt starts to disappear. As mortgage rates started to climb in September, a rush of buyers locked in interest costs. Now those buyers have up to 120 days to use the cheap debt or pay higher interest costs. With limited inventory, there’s a lot of competition to use the cheap debt before it expires.
Canadian real estate prices grew faster even as inventory eased. The benchmark price for a home reached $780,400 in November, increasing 2.35% ($17,900) from the previous month. Annual growth hit a rate of 25.31% ($157,600) as well. Price growth accelerated even as inventory eased a little.
The Bank of Canada (BoC) is waiting to hit full employment before raising rates. BMO, one of Canada’s largest banks, said, “mission accomplished.” Canada is past full employment, where additional hiring creates non-productive inflation. The last time the unemployment rate was this low in 2017, the BoC began raising rates. BMO says nothing is standing in the way for the BoC to raise rates. Other than the BoC’s desire to raise rates, of course.
The cost of a bailout is often cheaper than the cost of letting major institutions fail. The problem is the more often bailouts occur, the more likely they are to keep happening. NBER researchers have a novel solution — let the worst one fail.
By letting the worst player fail, moral hazard might be averted, leading to less risky deals. This problem goes far beyond banks now, and even mom & pop investors are getting in on the action. Is this how Toronto real estate should be treated to prevent moral hazard? Let’s take a dive through the data.
Canada’s oldest bank wants to remind consumers, real estate doesn’t go up forever. A BMO analysis shows Canadian real estate has only had two minor stumbles over the past decade. As a result, few people believe home prices can ever fall — but that’s never been the case. After the 1990s crash, home prices took almost two decades to recover back to their peak. While the bank doesn’t see a US-style, 2008-type crash, they want people to understand this isn’t a risk-free trade.
US Real Estate
The US Federal Reserve made significant moves to show the market that rate hikes are coming. Next month, Treasury purchases will drop by US$20 billion per month, and mortgage bonds by US$10 billion. If this pace keeps, quantitative ease will wind up by mid-March, according to RBC. This sets up the US central bank to hike rates three months earlier than expected. Just in time for the busy real estate season next year.