Time for your cheat sheet on this week’s biggest stories.
Canadian Real Estate
Many Canadian real estate markets are massively overvalued, according to the IMF. Their model shows Toronto’s estimated value is 28.2% lower than current prices. Vancouver’s estimated fair value is a smaller 13.3% drop to get to its fair value. Montreal bucks the trend by actually being within 1 point of fair value.
The largest overvaluation wasn’t in any of the typical global markets, but instead in a GTA suburb. Hamilton needs a 29.6% drop to get back to fundamentals. The organization isn’t forecasting when, or if, this will happen. However, the longer the inefficiency remains, the worse the impact on the economy.
Canada’s over-leveraged mortgage borrowers now represent the largest share of originations ever. OSFI, the country’s banking regulator, is watching highly leveraged borrowers. In Q4 2020, this segment of borrowers passed the 2017 peak share. When the issue hit this level in 2017, the regulator tightened mortgage lending. Low rates have wiped out the effect of the new measures.
Arguing when the Canadian property bubble started has become a national pastime. That’s because there are two different bubble criterias being met. The latest is a bubble on a bubble.
By 2013, even the Bank of Canada was warning about a real estate bubble. That’s because affordability was stretched. Those issues were never solved, but instead, the criteria for affordability was changed. Today, Canada has a cultural bubble, that’s spilling into the suburbs and small towns. Everyone in the country thinks someone will line up to buy their home at any price. It’s the definition of greater fool theory.
The Government of Canada has outright said they will not consider taxing home equity. The minister in charge of housing said, “Our government is not thinking, or considering… or bringing a home equity tax.” He followed with, “Any suggestion is false… we have clarified that a number of times.”
The statement follows increased calls to tax home equity, as a “cooling” measure. It also comes just a few days after the industry said they would “shut down” the discussion.
Canadian homebuyers are buying the hype, and it’s costing them hundreds of thousands more to buy a home. Due to the common practice of blind bidding, buyers need to guess how much the other person is bidding. This sometimes leads people to bid way over ask, even if there’s only one other person they’re bidding against. Diving into the data, agents that tried to start a bidding war in February, only found buyers half the time.
Canadian property affordability is deteriorating towards early 90s bubble levels. RBC says a median household buying today needs to spend 50.3% of their income on mortgage payments in Q4 2020. This is just below the previous 2018 high, but prices have climbed a lot since the end of last year. This likely means we’re past the 2018 peak, at much lower interest rates. The benefits of a mortgage rate cut have been more than eaten up by rising home prices.
Canadian home prices are the most overvalued in the G7, shows price-to-rent ratios. The IMF’s index shows a reading of 128 in Q2 2020, meaning the gap between rents and home prices grew 28% since 2015. This is the most of any G7 country and nearly 2x the G7 average. Canadian home prices have the most stretched valuations, relative to rents in the G7.
A record number of Canadians want to buy a home this year and think prices will rise. Mortgage Pros Canada’s annual survey shows a record average score for intention to buy a home. Their chief economist says this tends to foreshadow rising home sales. The survey also found people have record expectations for home prices to rise. The data shows the expectation of rising prices has no link to future price growth. Instead, it’s closely linked to what just happened, and people project it will happen again.
Canada’s national housing agency sees elevated risks in many real estate markets. The organization now has five of Canada’s largest markets, marked as “highly vulnerable.” In the previous quarter, the number was only two markets, so things are getting worse. Amongst the riskiest markets according to the agency, are Toronto, and Hamilton. The concentration of three markets in the same economic region is especially problematic.
Toronto Real Estate
Greater Toronto’s new home sales made a big drop, as pent-up demand releases after a hot year. There were 3,240 new homes sold in February, down 34.1% from the same month a year before. The substantial decline was largely led by a drop in condo apartment sales, mostly in the City of Toronto.
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