Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Most people only think of the impact of government borrowing in the context of taxation — and they believe it’s not a huge deal. Governments can borrow a whack of money, and they’ll most likely be able to pay off their bills. What most people don’t realize is in order to do so, they need to make use of interest rate manipulation.
By manipulating interest rates to artificially low levels, they aren’t just spending. They’re distorting the cost of any asset influenced by interest rates — from stocks to housing. The government’s supersized spending? Not a big deal in the context of them carrying debt. However, in the context of how it has distorted housing markets even further, it’s an epic failure.
Canada is now delivering homes at a rapid pace, despite home prices growth surging. The most recent quarterly data shows 18.4 homes completed per person the population grew by. This would have far exceeded the number of households formed, yet provided no actual relief for prices. In fact, home price growth has been accelerating to levels not seen in years. No wonder even Canada’s large banks have begun to say this has nothing to do with supply.
Canadian real estate listings are soaring, as the market sees a flood of inventory. There were 86,212 new listings in March, up 7.45% from a month before. Home sales made a more modest increase, coming in at 69,421 units in March, up 5.22% from the month before. There’s a whack of new inventory hitting the market, it’s just consumed by an unusual amount of demand. Sales are now growing slower than new inventory, while more investors state the intention to sell later this year.
One of Canada’s top politicians finally used the term “bubble” to describe housing. MP Vaughan, the Secretary to the minister in charge of housing, said it was difficult to get the air out of the bubble without an explosion. He also went through a list of cooling measures that have so far failed to cull exuberance.
Canadian bank regulators tightened leverage standards, but banks are loosening them. OSFI announced they would increase the rate used for stress testing uninsured mortgages. The increase would see maximum leverage decline by about 4.5% from before the hike. One bank has already launched a discreet pilot program to counter the loss of leverage.
Canadian first-time homebuyers (FTHB) are more interested in living in small towns than big cities. The trend of Millennials de-urbanizing started a few years ago but is now in the spotlight. BMO found 35 percent of FTHB are now looking to move to a small city or town. To contrast, only 30 percent of FTHB are considering one of the country’s major cities. This will rapidly transform the country’s demographics.
The Bank of Canada (BoC) is tapering the size of its QE program, though largely for technical reasons. The BoC is cutting its QE bond program by 25%, down to $3 billion per week. The decline goes into effect by April 26, 2021. The drop was accompanied by the central bank accelerating its recovery timeline. The acceleration will see the central bank drop its commitment to low rates by next year.
The BoC’s use of quantitative ease (QE) distorts markets, and housing activists want to end its use. A successful petition to parliament asks for laws around the use of QE, as well as forcing the BoC to consider housing in its policy. The petition already had enough signatures to warrant a response from parliament, after just a few days. The legislature will be responding to it later this year.
Hoping for Canada to address high home prices in the budget last week? You’re out of luck, and a little dense considering they said they actually want high home prices. The Federal government made many commitments to house the vulnerable. However, made no commitments for the middle class, which is now priced out of major cities.
Even their commitments to end money laundering were more lip service than action. A beneficial ownership registry will be created in 2025. Hear that criminals? Don’t you dare think you’re getting away with this. In four years, Canada will come looking for you… just please don’t move anything.
BMO warned rapid home price escalation would be delayed before it appears in inflation, but it’s finally here. At least, some of it. Canada’s annual CPI jumped to 2.2% in March, double the rate a month before. The bank’s analysis shows shelter costs were only second to gasoline prices, in the contribution of pushing prices higher.
U.S. Real Estate
U.S. home prices reached an all-time high, despite falling home sales. NAR reported the median price of existing-homes reached $329,000 in March, up 6.9% from the month before. This marks the 109th month annual home price growth has been observed, the longest the market has ever gone without a correction.
Booms in real estate tend to see higher risk of mortgage fraud, and that’s exactly what’s happening in the U.S. CoreLogic’s mortgage fraud risk index reached 122.9 in Q1 2021, up 11.9% higher than the previous quarter. The biggest increases were in hot markets like San Jose, Austin, and Las Vegas — all regions to see a recent boom. The market tends to see an increase in fraud when prices soar, as people see the risk of being caught as lower than the risk of not making enough money.
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