Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s banking watchdog is asking the country’s Big Six to put away a little more cash for a rainy day. This week OSFI increased the domestic stability buffer (DSB) by 0.5 points, pushing it to 3.0% — a record high. This is the amount of risk-weighted assets (RWA) that the banks need to put aside for a risk event. The decline doesn’t just mean bad news is expected, but it reduces credit liquidity as well. Buckle up.
The last Bank of Canada (BoC) rate hike pushed mortgage rates above the stress test level. BMO warned investors that borrowers at record low rates had been tested at 4.79%-to-5.25%. It seemed high in 2021, but it was insufficient and borrowers are now in uncharted waters. They don’t see an immediate issue, but it won’t be comfortable for recent borrowers.
Many Realtors were celebrating Canada’s real estate correction moderating this week. RBC, the country’s largest bank, didn’t quite agree with the take. They reiterated a real estate correction is still in full swing, with few exceptions. It’s expected to continue through next year, as lending conditions penetrate the market.
Canadian building permits fell as rising financing and soft sales lowered incentive. The value of permits fell to $10 billion in October, down 1.4% from the previous month. Residential permits represented $6.5 billion of the total, down 6.4% and made up virtually the entire fall. Developers are planning 5% fewer units since they can’t be profitably made without falling land prices.
Toronto Real Estate
The price of a typical home in Greater Toronto fell to $1.09 million in November, down 0.8% ($8,400) in the month. Prices are 5.5% lower than last year, making it the largest annual contraction since the last rate hike cycle. A typical home is now 18.4% ($245,200) cheaper than the March 2022 peak, and are generally seen falling further.
Vancouver Real Estate
Greater Vancouver real estate prices trimmed gains as price declines fell sharply. A typical (benchmark composite) home fell to $1.13 million in November, down 1.5% (-$17,200) from a month before. Prices have dropped 9.2% (-$131,900) since peaking in April 2022, and most experts see lower prices in the near-term.
US Real Estate
The Realtor.com economics team released its surprisingly bullish forecast for next year. Higher interest rates, a sharp drop in sales, and a surge in inventory are the key insights they see. It’s largely in agreement with most forecasts, except the conclusion. Typically these factors indicate a weak market, whereas Realtor.com sees this resulting in higher prices. In fact, next year they’re expecting rents to rise even faster than usual.
US employment data might not be as solid as it appears, warned BMO Capital Markets. The bank notes payrolls are booming, but household survey employment has been flat. Both indicators typically move in the same direction, diverging only before periods of volatility. They’re currently showing the largest divergence in history.
The US Federal Reserve is warning that a soft landing is a lot easier said than done. For those unaware, this is when interest rates rise at a slow pace, avoiding a recession. With home prices set to decline as much as 20% and trimming up to 0.7% real personal consumption, it won’t be easy. Stopping a drop in home prices after the biggest gain in history would also create a bigger set of problems.
Global Real Estate
The European Union’s watchdog for financial risk warned housing presents a systemic risk. At their annual meeting, members of Board see a weak market after record gains. They estimate home prices are up to 90% overvalued, meaning a correction will be a significant hit. It’s almost like all of these central banks shouldn’t have been ignoring the bubbles they made.