Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
When news of a global pandemic struck, Canada kicked into action… to prevent real estate prices from falling. By the end of March they started to cut interest rates, reduce stress tests, buy mortgage bonds, give payment deferrals, replace income in excess of wages lost, and inject hundreds of billions into credit liquidity at just the big banks. A couple months later, they suggested maybe wear a mask.
One of Canada’s big banks expects Canadian real estate to get cooling measures as early as this month. CIBC Capital Markets highlighted huge growth in home sales, price growth, and building permits – in the middle of winter. The economist said this demonstrates overly loose policy, which he expects to be addressed in the Spring Budget. The budget is expected by the end of this month, or early April at latest.
Canadian are now spending more on residential real estate than business development. Non-residential building, machinery and equipment (M&E) investment came in at 7.88% of GDP in Q4 2020. This was the lowest on record for the segment. Residential investment reached 9.27% of GDP in the same quarter. This is the second quarter the two have reversed. Canadian investment dollars didn’t disappear. They’re just being plowed into residential real estate, which is difficult to reverse.
Bidding wars for residential real estate are becoming more common, as agents price well below comps. The tactic lures in buyers that don’t realize the home is out of their budget, and tries to get them to max out. Widespread bidding wars are becoming a drain on the economy, argues some in the industry.
Canada’s non-bank lender data shows insured mortgages are defaulting at a higher rate than uninsured mortgages. The rate of insured mortgages in arrears over 90 days reached 0.31% in Q3 2020. This was 53% higher than the rate for uninsured mortgages. Just a quarter before, the insured mortgage rate was only 41% higher. Pre-pandemic it was only 27% higher. Uninsured mortgages are seeing an improvement over pre-pandemic levels. The rate of insured mortgages in arrears remains elevated, despite lenders deferring payments and trying not to have mortgages fall into arrears.
Canada’s largest bank thinks real estate is “far from risk free” right now. An RBC’s senior economists goes through a list of risk factors materializing, including higher interest rates faster than expected, and government intervention. The economy doing too well is a risk for high real estate prices, which has to be a first.
CIBC is seeing uninsured mortgage delinquencies improve, but Toronto is one of the few exceptions. The bank’s arrears rate reached 0.24% in Q1 2021, down 4 bps from the previous quarter and flat from last year. In Greater Toronto, the rate reached 0.17% in the quarter, up 3 bps higher than last year. It’s unusual for a high demand market like Toronto to see the rate tick higher, while it falls in the rest of the country.
Canada’s economy is going all-in on real estate, even more so than the US did during the peak of its bubble. The ratio of residential investment to GDP reached 9.27% in Q4 2020, up from 7.45% a year ago. For context, the US only reached 6.7% of GDP in 2006, at the peak of its residential real estate allocation. When economists saw the misallocation in the US, they sounded all alarms. In Canada, economists have stated Canadians just like to spend more on housing. Uh… yeah.
Canada’s national statistics agency found pandemic benefits were lucrative for households. An analysis from the agency found pandemic benefits more than replaced income lost. The lowest income households received 322% more money than the wages lost, on average. The highest quintile received 31.91% more money than they lost. Pandemic benefits more than replacing lost income helps explain an elevated savings rate.
Canada’s rate of mortgages in arrears at CBA member banks hit the 1990 record low, but Ontario and BC are exceptions. At the national level, the arrears rate reached 0.22% in November, down 1 bp from a year before. Ontario’s rate hit 0.10% in November, up 1 bp from a year before. BC’s rate came in at 0.15%, up 1 bp from a year before as well. Even a flat arrears rate in 2020 is interesting, considering the number of measures designed to prevent arrears from rising.
Toronto Real Estate
Greater Toronto real estate prices are rising rapidly, but it’s almost entirely due to detached homes soaring. The price of a typical home in Toronto reached $969,600 in February, up 14.81% ($125,074) from last year. When broken down, detached homes reached $1,196,700 in February, up 21.22% ($209,487) from a year before. Condo apartments reached $587,700 in February, up 1.38% ($8,000) from last year. Detached homes are seeing annual growth reach a multi-year high. Meanwhile, condos are seeing the lowest growth in over a decade.
Vancouver Real Estate
Greater Vancouver real estate is ripping higher, but like most cities – this trend is largely driven by detached homes. The composite benchmark reached $1,084,000 in February, up 6.8% ($69,019) from last year. A typical detached home reached $1,621,200 in February, up 13.7% ($195,342) from last year. Meanwhile, a typical condo reached $697,500 in February, up 2.5% ($17,012) from a year before. Detached home prices increased by almost 10x that of condo prices in dollar terms.
US Real Estate
US mortgage rates are rising very rapidly, as the yields rise due to increased inflation expectations. Freddie Mac data shows the average 30-year fixed reached 3.02% for the week ending March 4, 2021. Just a week before, this rate was 2.97%. The all-time low was in the first week of January, when it fell to 2.65%. The rapid climb in rates is likely to continue if the economy outperforms, wiping out buying power and making an increase in home prices more difficult to print.
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