Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s oldest bank sees massive overvaluations across the country. BMO estimates home prices are 38% overvalued in Q1 2022, a level never before seen. Home prices are expected to correct, but won’t cause a 2008-style meltdown. Borrowers have been stress tested which should limit the possibility of capitulation.
Are Canada’s major cities becoming too expensive? Perhaps you should consider moving to someplace more affordable — like New York City. Exuberance pushed the median home price in Greater Toronto ($1,098,000) and Greater Vancouver (C$1,374,000), well out of reach for most. Homebuyers often believe they’re buying early into a NYC type opportunity. Thinking about all of the money they’ll make, they drove prices even higher than in New York City (C$969,000). Whoops! Maybe one day NYC, driving a regional GDP larger than all of Canada, will be the next Toronto?
Why are Canada’s Millennials complaining about home prices in their city when they can move? It turns out most of Canada’s families could no longer afford the majority of cities in the country. A median household in Canada couldn’t afford a typical home in 69% of CREA markets with a house price index. That leaves minimal options for the majority of households.
Canadian real estate prices are significantly elevated above typical levels of affordability. A median household needs to spend 53.2% of its income just to cover the mortgage payments in Q1 2022. Over in Toronto (75.6%) and Vancouver (81.4%) requires an even higher share of income. All 3 measures have never been this detached from the long-term averages for very long.
Buying a typical home across Canada now requires a hefty income out of reach for most households. Servicing a mortgage on a typical home in Canada requires $154,400/year in annual income. As you might assume, it’s even higher in Toronto ($211,000) and Vancouver ($228,600). Even if you landed the down payment (a difficult task on its own), you still need to be in the highest income households in the country.
Canadian real estate is overvalued across the country, but Ontario is something else. Home prices in Ontario are 55.4% overvalued in Q1 2022, largely around the Greater Toronto Area. In the GTA, home prices are 41.2% overvalued, but its surrounding cities are up to 73.6% overvalued. The remaining fair valued cities in Canada are largely concentrated in the Prairies.
Canada’s real estate bubble even has experts adopting high growth expectations. Scotiabank’s worst case scenario is home prices RISE 9.8% over the next 12 months. A scenario where the economy spirals into the worst possible outcome has 3x typical growth? As you might have guessed, this is very disconnected from forecasts at other lenders.
A study from Canada’s national statistics agency expresses concerns about the recovery. They found aggregate GDP has already retaken the 2020 levels, and recovered. However, GDP per capita remains below levels seen at the end of 2019. This means a decline in the quality of life is most likely happening and it’s unlikely to be resolved soon. The OECD forecasts Canada’s high debt loads will see GDP per capita grow at the slowest pace of any OECD country… for the next 40 years.
US Real Estate
New home sales in the US are falling, relieving significant pressure from inventory. The SAAR of home sales fell to 591,000 in April, down 16% from a month before and 13.7% lower than last year. This helped push new home inventory to 444,000 units at the end of the month, the highest level since 2008. Prices are still looking firm, but it’s hard for them to grow further with falling relative demand.