Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canadian Real Estate Faces The Worst Market Since 90s Recession: CIBC
Canadian real estate markets haven’t been this bad since the early 90s recession. That was the take from CIBC, warning that slowing investment has softened demand for new housing. Considering they’ve bid up prices to the point they account for 70% of the market, developers no longer have a profitable market. Ironically, the lack of demand is likely to slow down building.
Over 4 In 5 Greater Toronto Leveraged Condo Investors Are Losing Money
Canadian real estate has been a money printing machine over the past few decades. That might be changing according to data from CIBC, at least for the near term. The vast majority (81%) of investors taking possession of newly completed condos in Greater Toronto have negative carry. That’s when the amount of rent collected is less than the cost of carrying a mortgage. Over 2 in 5 leveraged landlords taking possession of new condos have been in this position since as far back as 2017. However, with prices no longer rising at a breakneck speed and a wave of new completions scheduled, they may not be able to just flip the properties for huge profits.
Bank of Canada Sees “Robust” Real Estate Investment After Rate Cuts
The Bank of Canada (BoC) made a 0.25 point cut to the overnight rate this week, meeting market expectations. They cited slow inflation, a weak economy, and rising unemployment as factors supporting the easing. Once again, factors the market has considered when coming up with the consensus on rate cuts. What no one expected is the BoC’s forecast for real estate—they see the cuts helping to boost investment in real estate. An area they believe will boost the economy, though it’s unlikely to be a healthy boost as most have noticed.
Canadian Real Estate Won’t Get A Boost From Next Rate Cut: BMO
The BoC may see rate cuts providing a boost to real estate, but one of the country’s largest banks doesn’t. BMO Capital Markets wrote to investors to explain that many expect an increase to real estate investment, but it’s unlikely. The reason being, this cut was so widely anticipated the bond market has already priced in the easing. Fixed rate mortgages are already so much lower than the variable rate loans being eased by cuts, that it won’t be introducing any cheaper credit. Prior to the first BoC rate cut, the lowest fixed mortgage rate was already equivalent to six cuts lower.
Canadian Wages To Slow As Market Absorbs Excess Labor: BMO
One factor that’s presenting concerns for inflation is sticky service inflation, primarily driven by lofty wage growth. That’s unlikely to be a problem that sticks around for long with the massive inflow of unemployed workers. Canada’s rapid population growth has led to a significant oversupply of labor, expected to push wage competition lower in the coming months. While that’s good news for inflation, it’s not exactly great news for the economy—especially for those who recently arrived to Canada, now facing much higher unemployment than the national average.
Toronto Real Estate
Toronto Office Space Vacancy Hits A New Record High—So Did Prices
The flight from Toronto was thought to have been a temporary issue related to the pandemic. Instead, sky high property values and rising unemployment are driving companies out of the region. A new report from commercial real estate giant Avison Young shows that office vacancy continued to climb to a new record. At the same time, companies leasing space in the Greater region are looking to sublease their space, reducing their footprint. The resulting trend is over 1 in 5 sqft of space is now available for lease, as companies reduce their footprint in the city. This may produce a long-term hit to the region, which prided itself on being home to many of the companies now fleeing for greener pastures, along with Toronto’s labor force.
US Real Estate
US New Home Sales Surprise Lower, Inventory Rises To Rarely Seen Level
American new home sales came in much lower than expected last month. The consensus estimate had forecast annual growth for June, but instead saw a 7.4% decline over the period. Prices have barely responded to the weak sales at this point, but that may change in the coming months. Weak sales are helping inventory build to levels rarely seen outside of recession across the country. The issue is surprising not just to the forecasters, but also since the American economy is doing much better than Canada. In fact, it’s been surprising to the upside, and getting a number of upward revisions—not something that typically accompanies slowing home sales.