Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Slowing Canadian real estate sales are dragging renovation spending lower. An analysis from BMO Capital Markets shows renovation retail spending has begun to fall. Both segments are still elevated but rate hikes are expected to drop them lower. The deep dependence on housing means this will amplify the economic impact of a slowdown.
Canada’s real estate price boom has led to a significant debt binge secured by home equity. The balance of home equity line of credit (HELOC) debt reached $168.8 billion in April, up 1.8% from last year. Not huge growth, but a reversal of a negative trend and the highest growth since 2013. Including similar home equity-secured loans, the balance nearly doubles. The growth rate also rises 4x.
Canadians are permanently leaving at an unusually fast rate, especially for Q1. Over 13,000 Canadians emigrated to other countries in Q1 2022. It was the biggest first quarter since 2017, reversing a half-decade declining trend. The surge doesn’t mean the population is shrinking, since immigration has made up for it. However, it might show more people see opportunities abroad.
Canada has seen a big shift in where residents are seeing an opportunity (or not). The latest interprovincial migration data shows residents moving from one province to another. Ontario was the biggest loser, with a lot more residents leaving for other provinces. Alberta, Nova Scotia, and BC are the biggest winners, attracting significantly more people than left.
Canadian inflation soared to the highest level since 1983, with annual CPI growth reaching 7.7% in May. However, BMO’s chief economist warns it’s more like the 70s than the 1980s since CPI was slowing in the 80s. Instead, he points to 1973, a decade earlier when high inflation was just getting started. Monetary policy missteps drove CPI to high growth, with an external commodity crisis driving inflation even higher. Sound familiar?
A Canadian lawmaker is demanding a federal inquiry into money laundering. Earlier this month, BC’s inquiry into money laundering found Canada’s resources are unreliable. Member of Parliament (MP) Adam Chambers is now drumming up support for an inquiry to find out why. BC might be able to fix its problem with a new provincial inquiry, but the rest of Canada is still vulnerable.
Two prominent Canadian real estate professionals have been charged with fraud. They deny the allegations and haven’t been proven in court, but it’s led to big industry changes. Syndicated mortgages, common in development, were largely unregulated until recently. After a regulatory failure stemming from similar parties, syndicated mortgages now have rules. More important, regulators are warning consumers to stay away from them. They believe the risk is higher than the average person can take.
The narrative is lower rates help reduce housing costs, but that’s not what the data shows. Over the past year, the average mortgage payment climbed 3% despite rates lower than 2020. Slashing rates only briefly resulted in household wages outgrowing mortgage payments. Budgets adjusted soon after, more than absorbing any discount rates provided.
Canada’s beneficial ownership registry is supposed to help stop money laundering. There’s just one problem — the penalties for lying in the registry are relatively low fines. MP Chambers, who’s also trying to launch a money-laundering inquiry, wants tougher penalties. His new bill seeks to implement harsh penalties for intentionally hiding asset ownership.
Canadian lenders are writing off a smaller share of mortgages, but the size is getting bigger. The average mortgage write-off increased to $71,000 in Q1 2022, up 14.5% from the previous quarter. Bigger losses historically have led to a rise in defaults. If this trend continues, expect mortgage losses to rise to more historic levels.
US Real Estate
US real estate demand is falling faster than inventory. Existing-home sales fell faster than homes listed for sale. This has pushed supply to 2.6 months of inventory (MOI), tied at the highest level since August 2021. Finding a greater MOI requires going back before 2020 when the market was very different. Inventory changed dramatically, now the question is how long before buyers realize.
Global Real Estate
Central banks are facing a slowing economy and high inflation, both ominous signs. They’re choosing to tackle the latter, which is likely to slow the economy further. That was the take from the forecasting firm Oxford Economics. High inflation reduces consumption and creates a recession anyway. By focusing on controlling inflation, they might be able to spare us from an inflationary recession. Those are a lot worse than a typical recession, so at least that would be a win. Sort of.