Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
We look at one exhibit from the Cullen Commission, BC’s Inquiry Into Money Laundering in Canada. Counsel found a family was able to move $132 million from dodgy sources without setting off any warnings. That becomes more alarming when you realize they only ever declared peak earnings of $40,000.
In the process, they were able to buy at least $32 million in real estate and were even approved for mortgages. The most recent transaction (in 2020) shows they sold a property for double the amount paid. They say crime doesn’t pay, but I’m starting to have my doubts.
Canadian mortgages are becoming riskier for lenders, said credit ratings giant Moody’s. They found large mortgage lenders are concentrated in BC and Ontario real estate. Since both provinces have seen a rapid rise in prices, they’re more prone to a correction. If that happens, they estimate lender losses would be much bigger than pre-pandemic.
On the upside, the lenders have historically high capital levels to handle a crash. Losses would be larger, but lenders are in a much better position to handle them than they were in 2019. What a fun coincidence.
We interview investigative journalist Sam Cooper about his new bestselling book, Wilful Blindness. He explains how organized crime and corrupt officials launder their money. One way that’s become prominent is using real estate. It’s happening at such a scale in Vancouver, he says it’s captured the high end of the market. The issue isn’t just in Vancouver though, but in Toronto and Montreal as well.
CIBC sees a sharp and rapid climb for interest rates that might create “risk” for real estate. The Big Six bank has forecast the Bank of Canada overnight rate will hit 1.50% by the end of 2023. A higher overnight rate means higher mortgage rates and tapering of easy credit. Both factors are negative for real estate prices as well as carrying costs. The latter of which they’re warning consumers to consider when buying today.
Canadian housing affordability is slipping and forecast to get even worse. The Desjardins Affordability Index fell to 104.4 in Q3 2021, down 3.0 points from the previous quarter. This means if the index falls over 4.4% from here, the average household won’t be able to buy a house across Canada. The institution doesn’t see affordability getting a hit from higher prices though. It thinks home prices will soon hit a plateau, as rising interest costs weigh on growth.
The Canadian unemployment rate is back to pre-pandemic levels, but it’s not quite the same. The rate fell to 6.0% in October, down from the 6.3% reported the previous month. One reason the improvement isn’t as positive as it seems is that full-time employment fell. The rise in employment was due to an increase in part-time jobs making up for the lost full-time gigs.
Another contributor to the falling rate of unemployment was the participation rate. This is the share of the population in the workforce, which took a sharp fall. The employment rate fell, but with a smaller share of workers and fewer full-time jobs. Doesn’t have the same ring as just saying, “the unemployment rate fell,” does it?
Canadian home building intentions are officially in a correction, as permits fall. The real value of building permits fell to $6.9 billion in September, down 8.2% from a month before. This brings the seasonally adjusted value 16.1% lower than the June peak. A drop of more than 10% means a correction, which clears the hurdle for real dollars. Don’t worry about supply — at least yet. The number of units under construction is near a record high.
One of Canada’s largest banks sees the BoC hiking rates very rapidly over the next couple of years. Scotiabank is forecasting up to 8 full hikes of 25 basis points to the overnight rate by the end of 2023. The bank doesn’t see this happening because the economy is growing too fast, but due to inflation. The BoC needs to pump the brakes as the transitory narrative proves false. Eight times, to be precise. The bank warns it can be even more if they don’t get it under control soon.
Toronto Real Estate
Toronto real estate is in a “melt up” as panicked buyers sent prices in the low inventory market soaring. The TRREB benchmark composite price reached $1,128,600 in October, up 4.3% ($46,200) from a month before. Inventory is at typical levels, but sales are at low-rate induced pandemic volumes. The result is a lot of buyers squeezing the market, despite the whack of supply expected in the Spring. This should bring some relief in a few months, but probably not in November.
Greater Toronto new home prices are diverging by segment once again. The benchmark price of a single-family home reached $1,573,764 in September, up 3.4% ($51,796) from a month before. Condo apartments on the other hand fell to $1,036,831 in September, down 3.1% ($32,000) over the same period. Seeing such an odd divergence when inventory is relatively tight is strange, to say the least.
United States Real Estate
The US Federal Reserve will begin tapering its quantitative ease (QE) program. Beginning this month, they’ve announced they’ll taper their asset purchases by $15 billion. At the current taper pace, the US should be off QE by June of next year. What does this mean? Higher borrowing costs and less inflation. The US has yet to see the economy recover, but inflation is becoming a new risk that needs to be tackled.
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