Time for your weekly cheat sheet on this week’s top stories.
Canadian Real Estate
Canadian home prices have grown much faster than those in the US, but data shows incomes haven’t. From 1975 to 2020, the growth rate of Canadian home prices was 162.2% higher than the US growth rate. Over the same period, Canadian disposable income only grew at a rate 0.7% faster than in the US. The extra growth means Canada expects more recent buyers to devote significantly more income to shelter, than in the US.
Canadian real estate prices are up so much, just saving a down payment is an uphill battle. Saving a down payment for a non-condo apartment takes the median household 7.52 years in Q1 2021. This is about 87% higher than the historic average, over the past two decades. In Toronto and Vancouver, it would take 25 to 32 years, respectively. That’s just the down payment — we’ll have to talk about the income to carry the mortgage on another day.
The Bank of Canada is discrediting its own inflation research, says one of Canada’s largest banks. The central bank has shown research on why they prefer certain measures of inflation. Current CPI indexes are chosen to minimize sector-specific shock. This is ideal, preventing just a few industries from influencing all monetary policy.
So what’s the BoC doing? Ignoring the preferred measures, and planning around sector-specific shocks. This puzzled at least one economist, who is demanding the BoC show its homework. Otherwise, it’s just a few guys doing whatever they want with the money supply. Would that be surprising to anyone?
Canadian banks have forecast QE ending this year, and rate hikes sooner than thought. BMO and RBC both expect the Bank of Canada (BoC) to end their QE program by year-end. RBC sees interest rates getting a hike in Q3 2022, and BMO expects the first one in January 2023. The end of QE should see some longer-term borrowing rates rise shortly afterward. The hikes to the overnight rate were previously expected to be almost a year later.
The cost of building homes in Canada is rising much faster than the rate of inflation — and it’s not just a base effect. Stat Can’s 11-city residential composite index shows builder costs rising 5.62% in Q1 2021. From a year before, costs are now 11.7% higher. In regions with a building boom, believe it or not, the increase is actually even larger.
For example, in Toronto building costs have increased 15.5%. Building costs are ultimately passed onto the end-user. If they don’t fall real fast, they’ll push the cost of new housing a lot higher. In retrospect, that seems like it may be an intended consequence.
Canadian real estate is past peak momentum, but even past the peak is still very strong these days. Mortgage pre-approvals that were locked at record lows are rolling off. The BoC is trying to project hawkishness. Most important, the end of the pandemic means people can focus on life outside of the house. BMO sees these combinations of factors cooling the market over the next few months.
Inflation is rising, and while most are saying it’s temporary — BMO says pay attention. The BoC’s commodity index is up 24% in the first four months of the year, hitting the highest level since 2014. This is just one of the many input factors about pushing everything from grocery to housing higher. It’s also a lot more likely to hit the average household, compared to the 2.5% CPI most expect.
Canadian real estate developers are planning a lot more housing in the future. The value of building permits reached $10.9 billion in March, up 5.7% from the month before. It was the third month to print a new record high. Commercial buildings however fell to $1.5 billion, down 14.6% from a month before. More investment into building housing, and less into building workplaces. Maybe work-from-home is going to last a lot longer than many people think.
Low interest rates should have made it cheaper to carry mortgage debt. Except that’s not what happens in a bubble — the mortgage rate cut just means people spend more on housing. The average monthly mortgage payment reached $1,438 in Q4 2020, up 2.24% from a year before. Considering mortgage rates dropped 33% over that period, the cut wasn’t helpful.
Prices increased to absorb all of the extra borrowing capacity. The only people to benefit are those selling property, who don’t need to buy another. Those are better known as investors.
Canadian real estate sales growth is exaggerated, says the country’s largest bank. RBC said home resales and new listings increased between 140% and 462% in large markets. Most of this was base effect — a skew resulting from last year’s restricted trade in April.
The rate of growth looks like it’s accelerating, but home sales fell on a seasonally adjusted basis. Markets are still tight when it comes to inventory, but they are better supplied. Still, that didn’t stop emotional buyers from pushing home prices even higher.
Toronto Real Estate
Greater Toronto condos are finally jumping into the real estate market. Condo apartments are now growing at 3x the monthly rate of detached homes. They were previously stalling, and showing relatively low growth. That all reversed, as various levels of the state voiced support for higher home prices.
Greater Toronto new home prices are soaring — even faster than resales, if you can believe that. Single-family homes hit a benchmark price of $1,443,638 in March, up 29.4% ($327,700) higher than the same month last year. The condo benchmark reached $1,064,317 in March, up 8.3% ($58,900) over the same period. The market was previously slow but is starting to pick up very quickly over the past few months.
Vancouver Real Estate
Greater Vancouver real estate prices are seeing a surge in growth these past few months. Detached homes have been pretty hot throughout this whole market, but condos are a new story. The condo benchmark reached $729,600 in April, up 1.9% ($13,800) from the previous month. This works out to an increase of 5.9% ($40,800) from the same month a year before.
More than a quarter of annual growth was over the last month — showing this isn’t a data skew. Buyers are suddenly very interested in the condo apartment market. Once again, this comes shortly after the government said it would be unacceptable for prices to fall. It must be a coincidence.
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