Time for your weekly cheat sheet on this week’s top stories.
Canadian Real Estate
The Canadian Real Estate Association (CREA) released date for their largest markets. The data point that jumps out is the shift in the sales to new listings ratio (SNLR). The indicator, used to determine if it’s a buyer’s market, showed a dramatic shift lower. Every single major market west of Ottawa saw the SNLR decline from last year. If your real estate agent is still saying markets are local, it might be time to find a better agent.
Canadians have racked up a huge amount of equity in their homes, and now they’re looking to spend it. Loans secured by real estate reached an outstanding balance of $284.8 billion in May, up 5.44% from the year before. Maybe people are using it invest in businesses?
*checks paper work from regulators*
Nope. $256.8 billion of that was for personal use, up 6.22% from last year. People are withdrawing home equity for personal consumption. That’s a lot of borrowing from future economic growth, being used today.
Residential investment, a.k.a. spending on building and renovating homes, is off of highs. Residential investment hit 7.6% of GDP in Q1 2018 when seasonally adjusted, down from 7.8% in Q4 2018. Not adjusted, that number falls substantially lower. Since seasonally adjusted numbers trail unadjusted movements, expect this number to fall further.
For context, the US residential investment peaked at 7% in 2005. It collapsed after the Great Recession, close to 3%. Today, a decade later, US residential investment is 4% of GDP.
Altus, the real estate consulting firm, just published an analysis of renovations. The most interesting insight was $17 billion of home equity lines of credit (HELOC) were used to fund them. It wouldn’t be interesting if the extraction of home equity was by young people, but it isn’t. Over 25% of borrowers are seniors, that should be technically retired. Borrowing a variable rate, callable loan, secured with peak valuation of your home, while you’re in retirement? That’s the senior equivalent of extreme sports.
The Canada Mortgage and Housing Corporation (CMHC) released it’s quarterly assessment of Canadian real estate. The agency rated Canadian real estate markets “highly vulnerable.” Almost every market west of Ottawa is showing some sort of sign of vulnerability. Toronto, Vancouver, and Victoria were also rated “highly” overvalued. It’s only a non-partisan, government-backed organization noting trouble in the market. This is fine.
The Bank of Canada’s housing affordability index shows housing is more affordable today than in 2008. Like, seriously. Canadians spent 35.4% of disposable income in Q1 2018, lower than the pre-Great Recession peak of 39.2%. Despite the fact that it’s lower, doesn’t mean it’s going to remain lower. Actually, it’s more likely to spike very quickly.
Homeowners today are more vulnerable to a rate shock. In 2008, household debt was relatively low while rates were higher. Affordability improved by lowering interest rates 4 points. Today, interest rates are near all-time lows, and household debt is at a high. Rising rates will increase the cost of debt servicing from existing households very quickly as a result.