Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Higher interest rates have knocked the exuberance out of Canadian real estate. The sales to new listings ratio (SNLR) historically has led annual price growth by 3 months. It’s so far been reliable over the past few months. If the trend continues at this pace, all of 2022’s price growth can be wiped out as early as this summer.
Policymakers are promising a soft landing, but virtually no one believes that. BMO Capital Markets shared that take, with its chief economist explaining eroding conditions. Yields and commodity prices are cratering against a backdrop of higher inflation. This will produce a recession if left too long. Higher interest rates are also likely to result in a recession, but reduce inflation. However, the latter would reduce the chances of stagflation.
Canada’s banking regulator is preparing lenders for real estate price decline. The Office of the Superintendent of Financial Institutions (OSFI) is directing their attention to loan size. Underlying valuations of the assets securing the loans are less reliable during bubbles. This can provide risk for the lenders and the regulator would like them to be better prepared. OSFI’s head previously warned he sees a housing crash, so the concerns may not just be theoretical.
Real estate prices surged in almost every suburb, even outpacing exuberant growth. The Bank of Canada attributes this to a change in behavior driven by the work-from-home trend. However, this phenomenon is known as bubble contagion — when a bubble diffuses outwards. We took a dive through newspaper archives and found it has occurred during every real estate bubble.
Canadian provinces are highly dependent on real estate for their economic growth. Over the past two decades, real estate services have outpaced GDP. Provinces now generate up to 1 in 5 GDP dollars from these services. High household debt and rising interest rates can turn this trend into a drag on the economy really fast.
Ontario is set to approve the largest rent hikes in a decade. The maximum increase for existing-tenants in most rentals built before 2018, is 2.5% for 2023. This is more than double the previous year’s guideline. The hikes are due to rising inflation in 2022, but also are used when calculating inflation. Raising the increases this high will help to entrench inflation, making it sticky.
Canada’s largest bank is turning bearish on the economy. High inflation eroded business activity, forcing the BoC to raise interest rates. The combination will reduce economic growth quickly, with signs appearing by the summer.
US Real Estate
US pending home sales have dropped and the industry is forecasting further slowing. Pending existing-home sales fell 13.6% from last year, falling towards historic levels. It’s so far produced little relief when it comes to home prices. But with healthier levels of inventory that can change fast.
Global Real Estate
The Bank of International Settlements warns that the global economy may be in for a bumpy ride. Low rates were held for too long, driving high debt loads, asset bubbles, and high inflation. This increases the probability of a hard landing.