Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canada re-elected the same leadership, but with a very different housing strategy. They promised demand inducement schemes, supply subsidies, and improvements in trade transparency. The demand measures are likely to push home prices higher, according to experts. That’s a negative for buyers, but great news if you’re a seller. As for trade transparency, no market has ever been hurt because it was “too transparent.”
Canadian long-term bond yields ripped higher last week, along with the rest of the world. The Government of Canada’s 10-year bond yield reached 1.33% on Thursday, the highest it’s been since mid-July. Rising yields are good news, since it means the economy is ready to function with less stimulus. Behind the move is a number of global central banks making “hawkish” statements.
Last week half of Canada’s Big Six banks cut mortgage rates, but may have to reverse them soon. Banks cut the rate on their uninsured 5-year fixed-rate mortgages as bond yields fell. This past week, however, yields soared as central banks hinted at the need for less stimulus. As a result, mortgage rates will climb, which one expert says can happen as early as this year.
Canada is going against expert advice and increasing the maximum insured mortgage size. The government has promised to increase the maximum home price to $1.25 million. It’s a 25% increase from the current levels, for the most highly leveraged home buyers. Credit expansion tends to increase home prices, so expect this to act as a tailwind for price growth. Or at least prevent home prices from falling further.
Canada has never before seen this many homes under construction at the same time. The seasonally adjusted annual rate (SAAR) of starts reached 260,500 homes in Q2 2021, up 28% from last year. Units under construction also reached 320,000 homes, up 13% over the same period. RBC has forecast the most supply since the 1970s will be delivered by next year.
The Canadian Real Estate Association (CREA) doesn’t see much action for the rest of the year. They’re forecasting the average sale price will reach $680,025 in 2021, flat from August data. Next year though, they have forecast provinces will see up to a 10% increase. It might not be as big as the recent gains, but the forecast is huge, especially after this year’s move.
Canadian mortgage debt is growing at the fastest rate since 2008 — way faster than the economy. The balance of mortgage debt reached $1.75 trillion in July, up 9.6% from last year. At this level, the size of mortgage debt is now the equivalent of 89% of GDP. The more highly leveraged households are, the bigger the drag on the economy.
One of Canada’s largest pensions just got into the booming reverse mortgage business. The Ontario Teachers’ Pension Board is acquiring HomeQ, the owner of HomeEquity Bank. The bank is the largest reverse mortgage lender in the country. The deal is a bet on an increase of house-rich, cash boor retirees into the future.
Canadian inflation is forecast to double next year, according to the OECD. The agency expects an average of 3.1% annual growth in 2021, up 0.3 points from their previous forecast. Next year they’ve forecast 2.8% annual growth, up 1.4 points — doubling the previous forecast. Higher inflation is starting to look less transitory.
Canadian employers are facing a labor shortage, but wages aren’t rising. Statistics Canada (Stat Can) reported 731,900 job vacancies in Q2 2021, about 25.8% higher than Q2 2019. About 4.6% of jobs across the country are now vacant. Wages for those jobs are only up 3.6% though, less than inflation. Despite elevated unemployment, a shortage of labor isn’t driving wages higher.
US Real Estate
US existing-home sales are falling, but so is the amount of inventory. The seasonally adjusted annual rate (SAAR) of existing-home sales reached 5.88 million in August. This is a drop of 1.5% compared to the same period a year before. Inventory fell to 1.29 million, down 13.4% from the same period last year. The inventory squeeze eased from last year, but still remains about the same as it was in July.
Global Real Estate
The Reserve Bank of Australia sees two risks forming around high home prices. The first is for the banking industry, since mortgages make up 60% of outstanding loans. Second is highly leveraged mortgage borrowers, who are now behind 20% of originations. The Reserve Bank isn’t worried… yet. But they’ve said they are monitoring the situation closely. This echoes similar statements made in Canada just a few weeks before.
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