Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
Canadian bond yields are soaring as inflation drives the cost of borrowing higher. Still, the BoC is unlikely to raise rates according to BMO, one of the country’s biggest banks. Despite 2020 seeing the sharpest climbs in bond yields, they believe the BoC will use any excuse to not raise rates. They now see the central bank raising interest rates in March at the earliest. Though that would still be much earlier than the BoC has said they would.
Canada needed a tighter monetary policy last year. BMO unpacked Toronto real estate prices, showing annual growth near the 2017 peak. Similar observations can be made for most Canadian real estate markets. BMO points out when growth was this high in 2017, all levels of government were looking to slow buyers. Now all levels of government are looking to give them more debt. It’s the opposite of what they know is effective governance.
Canada’s largest real estate markets have significantly more foreign capital than previously thought. Non-residents owned 3.4% of Ontario’s housing stock in 2020 and 4.7% in British Columbia (BC). This number climbs for new construction built after 2016, rising to 5.6% and 9.0%, respectively.
The share increases even further for recent builds of condo apartments in Ontario (9.2%) and BC (13.4%). One in ten new condo apartments has a non-resident owner on the deed. The country remains very attractive to foreign capital, despite the narrative.
The Government of British Columbia is giving deep pocketed homeowners a tax break. For 2022, the threshold is being raised 21.5% to a whopping $1,975,000. The BC Home Owner Grant provides a property tax subsidy for primary residences, as long as the home is below the threshold. Property tax subsidies are common for low income families, not people in $2 million homes. This either says a lot about affordability, or helps explain high home prices.
Canadian wages have fallen behind inflation for a ninth consecutive month. In December, the average weekly wage is now 1.26% lower than a year ago, once inflation adjusted. Low rates are typically used to stimulate more consumption. However, if they’re left too low for too long, it results in higher prices. That’s exactly what’s happening, as the issue turns non-productive.
Back in October, the Bank of Canada (BoC) used lumber as an example of transitory inflation. Prices for the commodity had soared until May, reaching over $1,600/mbf. By September, it had reached less than $500/mbf. This was used to argue credit wasn’t overly easy, but prices will correct. Just a few weeks later, prices went soaring, hitting $1,209/mbf last Thursday. With the US Federal Reserve now agreeing inflation is not transitory, it makes the BoC appear clueless. This might cause a very abrupt change in tone at the next meeting, but don’t expect much else.
A CMHC-funded working group had a few suggestions for bringing home prices down. One suggestion raised controversy — taxing home equity. Generation Squeeze, an academic-led independent group, consulted the industry for ways to tackle a lack of affordability. We unpack the suggestion, what works and a potential risk that can render it ineffective.
According to residential building permits, Canadian residential home building intentions are surging higher. In November, the value of permits reached $7.8 billion, up 12% from a month before. It was the biggest month since March 2021, and has been running about 50% higher than pre-pandemic. There’s a lot of housing in the pipeline.
Vancouver real estate inventory has fallen to one of the lowest levels ever. The benchmark prices reached $1,230,200 in December, up 17.3% higher than a year before. With home prices rising faster than household incomes, few people want to sell. Instead, inventory has pulled back to a 30-year low, sending prices soaring.
Over half of Canada will see a negative impact if mortgage costs rise, apparently. It’s a common narrative repeated, amplified by a survey last week. Fortunately that’s not true, since less than a third of Canadians have mortgages. There’s also no regulatory reason to worry, either. Mortgage borrowers have been stress tested for this reason.
People used to get excited about paying off their mortgage as they near retirement. Not in 2022 Canada, where Boomers are scooping a larger share of the mortgage market. They’re actually the only demographic to see their share of outstanding mortgages rise. This is also near record sales, meaning they’re scaling the number of mortgages they take out faster than home sales grow.