Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Global agencies are ringing the alarms, but Canada’s central bank only sees 2 bubbles. The HPEI, the Bank of Canada’s exuberance indicator, only flagged Hamilton and Montreal. Either the 2 markets are such bubbles it created a national red flag for global agencies, or the BoC model needs some work. Toronto and Vancouver, which have received international attention, aren’t overheated, apparently.
The US Federal Reserve killed the transitory narrative, and Canada felt it. US chairman Powell said it was time to retire the word transitory, as inflation turns sticky. This was a bit of a problem for Canada, which reiterated the transitory narrative earlier in the week. The result was Canada’s yield curve had begun to flatten, applying pressure to raise rates.
Canada now devotes more investment to housing than business, and that’s not good. The capital stock reached $5.5 trillion in 2020, with residential investment making up over half. This is a unique situation, and the first time it’s happened going back to 1961. That was the year they began to track the numbers. National Bank warns this will result in capital looking for more productive investments. They use Canada’s pensions as an example, which dramatically lowered exposure to Canada.
Canadian investment in residential structures made the sharpest decline in over a decade. Seasonally adjusted investment fell to $231.2 billion in Q3 2021, down 7.1% ($17.7 billion) from the previous quarter. New housing investment fell to $102.7 billion, down 2.6% from the last quarter. It isn’t a concern for new supply yet, which is elevated above historical trends. It will be a concern for the resources for building, which will see demand ease. If construction costs fall, either price follows, or margins get bigger.
The Canadian economy followed Australia and the US in a v-shaped recovery but never quite made it. BMO took a look at GDP for Australia, Canada, and the US. Canada is the only of the three that didn’t reach its pre-pandemic high for output. The slow recovery is odd when paired with the escalated inflation. Typically inflation is the result of an overheated economy. Easy money hasn’t been able to recover the economy but is now turning non-productive.
One of Canada’s largest banks made an unusual move — it demanded the central bank halt stimulus. This week, the National Bank of Canada’s chief economist wrote an open letter to the Bank of Canada (BoC). The letter outlines issues with the excessive use of monetary stimulus. They suggest the central bank halt stimulus ASAP and raise rates in the first quarter. If they stick to their current schedule, they risk undermining the recovery.
One of Canada’s largest real estate brokerages doesn’t see higher rates as a hurdle. Re/Max forecasts up to 20% price growth next year for real estate markets. In Toronto, they expected next year’s price growth to even exceed this year. It’s an optimistic call, considering rates are expected to rise next year. This would be the opposite environment that helped propel home prices last year.
Canadian permits to build new homes fell further into correction territory. Building permits, a leading indicator activity, reached $10.3 billion in October, up 1.3% in a month. That’s total construction, though — permits for new housing are now down 16.5% from the peak in March. The rise in the total was due entirely to non-residential building. This includes institutional, commercial, and infrastructure investment.
Canadians are back to tapping their homes as ATMs, now that they don’t see a reason for prices to fall. The outstanding debt balance hit $270.2 billion in September, up 0.65% ($1.7 billion) in one month. The balance is 4.40% ($11.4 billion) bigger than last year. More than 14% of annual HELOC debt growth was over 30 days in September in the past year. With HELOC debt now over 10% the size of GDP, it’s become a significant contributor to make up for the lack of wage growth.
One in five Canadians now live in “shelter poverty,” and it’s worse for new immigrants. About 18.0% (6,400,200) of people in Canada live in shelter poverty, spending more than 30% of their income on housing. This rate is actually 31% (353,900) of the population in shelter poverty for recent immigrants. That’s 1 in 5 people in Canada living in shelter poverty and 1 in 3 new immigrants living in these circumstances. With immigration set to scale, expect more recent arrivals to find themselves in poverty.
US Real Estate
US real estate has entered a bubble for the first time since the notorious 2007 one. The US Federal Reserve’s exuberance index shows America is now in a bubble. As of Q2 2021, the Fed’s warning system for a housing bubble shows the country is officially in a bubble. No need to fear the economy will implode — yet.
After the Great Recession, the Fed created this system as an early warning. They hoped to pop bubbles before they became too big by flagging them early. This would prevent a minor issue from turning into a big one, like 2007. Now, the trillion-dollar question is whether they’ll ignore their own warning system.
US pending home sales are being propped up by South and Midwest real estate. The Pending Home Sale Index, a leading indicator for home sales, jumped to 125.2 in October, up 7.5% from a month before. It’s about 1.4 points lower than last year. Most of the strength is still in the South and Midwest regions. Traditionally the boom came from the Northeast and West markets. Since the pandemic, that’s been flipped and has yet to flip back.
Toronto Real Estate
Greater Toronto real estate prices are soaring again at one of the fastest paces on record. The cost of a typical home reached $1,172,900 in November, up 3.92% ($44,300) from a month before. Composite home prices across the region are now 28.31% ($258,785) higher than last year. It was both a record high for prices across the area and a little lower than the record for price growth.
Vancouver Real Estate
Greater Vancouver real estate is making up for lost time after a lull in price growth over the past two years. The price of a typical home reached $1,211,200 in November, up 1.0% ($12,000) from a month before. Compared to a year ago, home prices are now 16.0% ($167,000) higher. For context, about 94% of price gains over the past 3 years was over the past 12-months. The market needed low rates to knock it out of its lull.