Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canada’s largest bank is preparing for a big drop in home prices in a downturn. RBC’s worst case scenario for Canadian real estate is a 30% price drop, with prices still down by 2027. The bank warns this is the “worst case,” but now they’re placing greater weight on the outcome.
Canada’s oldest bank is telling households to prepare for the end of the low rate experiment. Rising rates have put an end to the 15 year run of hard-to-grow inflation. As a result, bond yields show much higher interest rates will be used to stabilize inflation. Currently the market is pricing at rates that haven’t been seen since the Great Recession. Most thought those days were behind us.
Canadian real estate got a big boost from real estate investors and then some. Low rates fueled investors purchasing 1 in 5 homes across the country. It’s up significantly from the trend and shows a tight relationship with low rates. The additional market share is coming at the expense of other segments like first-time buyers.
A new release from the Bank of Canada shows over 1 in 4 mortgage borrowers are highly indebted. Nearly 27% of borrowers in Q1 2022 had debt-to-income ratios of 450% or higher. This helped to push the total share of highly indebted (including those without mortgages) to nearly 1 in 5 households. It sounds ominous but most debt outstanding is owed by high income households. Lenders typically don’t lever up households they can’t recoup losses from.
The Bank of Canada (BoC) sees most major real estate markets showing signs of a bubble. In an update to the House Price Exuberance Index for Q1 2022, they flag five markets and warn “most” show signs of exuberance. Exuberant markets are how economists say “bubble” without freaking the public out.
Soaring inflation is causing Canadians to starve, as food costs push out of reach. A new report shows over a fifth of households have recently gone hungry. It also reveals soaring inflation and high housing costs are the primary cause. Canada was warned the issue would turn systemic, now it impacts around 7 million people.
Canadian mortgage borrowers began to taper their mortgage binge before rate hikes. Data from TransUnion Canada shows originations fell sharply in Q4 2021. Not one province showed annual growth, with Ontario leading the pack lower. It was just a small group of home buyers going all in, as more people folded and declared, “too rich for my blood.”
A new study reveals higher material and labor costs aren’t impacting builder profits. Looking at the average margin, CoConstruct found margins are actually climbing — not compressing. The surprising results indicate buyers were willing to absorb increased builder costs.
The Bank of Canada released the results of its latest Financial System Survey. It reveals more financial institutions are becoming less enthusiastic about the economy. About 29% of institutional risk professionals expect economic shock in the coming year. More are worried a large shock that can’t be mitigated in advance will hit soon. However, virtually all respondents felt it’s something Canada will recover from fairly quickly.