Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s housing supply is growing faster than the population and has been for decades. BMO economists dived into the latest Census data and found the population grew 5.2% from 2016 to 2021, a huge amount. Housing supply increased by 5.7% over the same period, outpacing the population. This trend goes back to 2001, according to Canada’s oldest bank. Their economists acknowledge more supply is needed, but the speculative mindset is what’s driving prices.
Canada is seeing suspicious transactions surge higher, but doing fewer audits. FINTRAC received 468,079 suspicious transactions in the 2020-2021 period ending March 31st. It increased 21.2% from the previous year and is 271.6% higher than five years before. At the same time, the agency is conducting 62.2% fewer compliance audits — despite more funding. It’s important to remember this is just suspicious transactions, not all transactions.
Canadian variable rate mortgages are about to get a lot more expensive soon. These mortgages are based largely on the overnight rate, which hasn’t moved much. The Bank of Canada is forecast to increase the rate as much as 600% over the next two years though. Desjardins estimates this will drive the cost of mortgage interest to double the current rate by mid-2022. Interest costs have been very low and borrowers are tested to ensure they can pay a lot more. However, recent borrowers may not save as much money as they had previously thought they would.
Canada is softening its position on rate hikes while the US is beginning to sound the alarm on loose policy. The Bank of Canada Governor communicated supply chain issues are behind high inflation. He sees the pressure on prices resolving over the next few months, as supply catches up. In the same week, the US Federal Reserve called it an inflationary shock that requires much higher rates. The US is now considering “super” rate hikes to resolve the issue Canada thinks will largely go away on its own.
Ontario released its ambitious plan to build 1.5 million homes over the next decade. Canada’s oldest bank isn’t buying it, saying it’s next to impossible and probably not needed. BMO says current construction is way above normal, and already experiencing labor and material shortages. This plan calls for even more building in a short period of time, despite the constraints still existing. The bank’s economist not-so-subtly hints, this is a similar plan heard during the late 1980s bubble.
Researchers are finding that fast home price growth facilitates higher birth rates. The catch is you need to own a home, otherwise fast-rising home prices lower the odds of giving birth. NBER researchers found births to homeowners increase 2.1% for every $10,000 home prices climb. Separately, European researchers found the impact similar in countries with pro-natalization policies. This may imply social programs to facilitate births don’t offset the influence of home prices and births. As the average age of first-time buyers climbs above “peak” reproductive years, expect a lot less babies.
Canada’s promise to diversify its economy went the other way, with energy back in the spotlight. Just the surplus from Canada’s international energy trade has reached over 5% of GDP in the last quarter. Canada has never been more dependent on energy, which has been the opposite goal of policymakers. BMO highlights this concentration can present an issue as the world tries to embrace ESG investing.
Canadian real estate prices are showing rapid growth but slowing, says Stat Can. The 6-City index, which tracks the largest housing markets, slowed in annual growth. This is mainly due to resale housing, which has been soaring recently. New home price growth is accelerating, just not as fast as existing homes. Real estate board data disagrees with that take, showing home price growth is still hitting record highs.
According to Desjardins, Canada’s economy won’t be able to keep up with the US interest rate hikes. The financial institution sees Canada and the US making their first rate hikes at the same time. However, due to Canada’s more vulnerable and rate-sensitive economy, it can’t keep up. The firm is dropping one rate hike for Canada over the next year, as the country has more difficulty recovering.
Canadian business insolvencies are back with the biggest jump in decades. The OSB reported Q4 2021 is up 36.8% from the previous quarter and 9.7% higher than before. Filings are still below the pre-pandemic levels, but CAIRP warns this doesn’t mean things are okay. Often business owners just close and carry the debt instead of filing insolvency. Many aren’t clear on their options.