Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s real estate market resembles the late 80s bubble, according to BMO. Charting Ontario price growth over the two periods, they found similar trajectories. They also see the same issue popping the current bubble that did the 80s — higher interest rates. BMO says people will be “surprised” by how fast supply issues resolve with falling prices, like in the 80s.
Canada’s top bank regulator called housing a “speculative fever,” last week. In a podcast interview, the OSFI superintendent warned prices could fall up to 20% in some markets. He sees higher rates acting as the trigger for the collapse in demand, but doesn’t expect a financial crisis. Since the Great Recession banks adopted stronger buffers to protect themselves from these events. How’s your buffer?
Bank of Canada researchers have found investors are now a big share of the mortgage market. About 1 in 5 mortgages (21.6%) issued were borrowed by investors. Cheap mortgage debt was supposed to stimulate homebuyers. However, it’s finding its way largely to the crowd best positioned to borrow — investors.
As public health restrictions linger, companies are realizing they need less office space. Statistics Canada (Stats Can) found that 4 in 10 (43.0%) people are working at home, that typically don’t. That’s on top of the 24.3% of the working-aged population who works permanently at home. Expensive cities had the biggest share of permanent at home workers, such as Ottawa (40%) and Toronto (34.7%).
The Bank of Canada (BoC) Governor appeared before a Senate committee last week. Explaining the current state of policy, he said the need for monetary stimulus is over. He warned households to expect higher interest rates, but inflation problems will persist. The BoC sees inflation falling “close” to target as late as 2024 — two years from now.
Canadian building permits made record gains last year, but mostly due to inflation. The value of building permits reached $126.5 billion in 2021, up 25.6% from the year before. Stat Can estimates two-thirds of that increase was due to inflation, with real growth 9% higher. Inflation representing 16 points of non-productive growth is much higher than CPI indicates.
Canada’s financial crimes watchdog just fined the world’s largest bank. ICBC, a state-owned Chinese bank subsidiary, failed to report suspicious transactions. FINTRAC discovered the administrative issue during a routine audit in 2019. Two years later, they fined the bank over $700,000, and said the issue has been resolved. FINTRAC refused to comment on how the fine size was determined, but ICBC has already paid it in full.
Canadian real estate prices are rising unreasonably fast, and it’s a persistent issue. The US Federal Reserve estimates annual price growth of 21.4% in Q3 2021, more than double the 11.6% growth in the US. Since 2005, real home prices in Canada are up a whopping 140% in Q3 2021, about 819% faster than the US. Incomes, as you may have guessed, have shown nowhere near this kind of growth.
Canadian home builders have never felt more positive about the real estate market. The index for single-family (84.9%) and multi-family (87.1%) reached the highest level ever in Q4 2021. Rising builder costs had dampened sentiment earlier in the year. Materials are up $68,000 on average, and labor has jumped 20% since 2020 — but that’s no longer a problem. Buyers are more than willing to absorb the premium, and demand remains strong.
Canadian real mortgage rates, the inflation-adjusted cost of borrowing, is now negative. Insured variable real rate mortgages fell to -2.5%, and uninsured fell to -2.4% in November. Interest rates are failing to rise as inflation soars, making the market inefficient. This is as close to free money as buyers can get, leading to big premiums paid on housing.
Toronto Real Estate Prices
Toronto real estate prices are rising at an unbelievably fast rate. The TRREB composite benchmark price reached $1,259,900 in January, up 4.29% ($51,900) from the previous month. Prices are now 33.29% ($314,667) higher than last year — about the cost of a whole house in Canada just over a decade ago.