Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian real estate is currently in the middle of the longest expansion of home prices in the G7. Home prices in the country have currently gone 24 years without a correction. That’s triple the length of the US and UK, and double any other G7 country. This sounds great unless you know what a duration effect is.
The longer a market goes without a correction, the more likely it is to be inefficient. The more inefficient a market, the larger and more destructive it becomes in the event of a shock. A real shock, not a government-induced one.
Canada’s most prominent real estate bubbles are seeing home price growth slip. Toronto home prices only increased 0.38% ($4,000) in July, about a tenth of the gains seen in February. This caused the annual rate of growth to fall to 18.1%, shaving off nearly two points of growth. Similarly, Vancouver home prices were flat in July. This annual rate of growth consequently fell to 13.8%. These may not seem like big changes, but they can be. Home price growth caused FOMO to push prices higher. As it disappears, it also causes buyers to wait on the sidelines to see what happens. Or just deters the need to “get in” to the market.
Canadian home prices are soaring, but resales are flying twice as fast as new homes. Home prices in the urban aggregate made an annual increase of 13.5% in Q2 2021. Breaking it down, new home prices increased 7.8% over the same period. Existing-home prices (aka resales) grew 16% from last year. The difference is surprising, mostly considering how much builder costs have increased. Resales don’t have increasing input costs, just much easier credit.
The head of Canada’s central bank is trying to manage inflation expectations… by writing an opinion piece. Bank of Canada governor Macklem wrote an op-ed on inflation in a national newspaper recently. In it, he didn’t use any data, but repeated recent talking points. The same points economists at large banks have said just aren’t true. We unpack his opinion piece, and what economists have stated is incorrect.
It might seem like the majority of people have been working at home in Canada, but that’s not the case. Only wealthier households were likely to be working at home. National statistics show only 45% of the top 10% of the income distribution, worked at home from April 2020 to June 2021. As the household income dropped, so did the likelihood of it working from home. When you get to the bottom 10% of income, only 5.2% of households were able to work from home.
This tells us a lot of things, but the biggest standout is the mobility of high-income workers. It may mean the boost to secondary housing markets may not be as temporary as some think. High-income households can move, and not depend on expensive city real estate. Whereas low-income workers are the ones that need to pay for pricey shelter.
Lumber costs have been increasing over the past year, sending new home costs soaring. The CHBA found 52% of members have seen lumber prices push building costs over $30,000 higher in Q2 2021. More specifically, 30% have seen costs increase at least $40,000. Another 22% have seen an increase between $30,000 and $40,000. Don’t worry about the builders though. These costs get passed onto consumers.
Canadian home buyers need to save for decades to live in the country’s major employment markets now. National Bank of Canada (NBC) estimates it would now take 9 years to save for a typical home in the country. This is more than double the average since 2000. In Toronto, it jumps to 27 years of savings, about 5x longer than average. As for Vancouver, a median household needs 34 years, about triple the average. This is either a liquidity crisis or an inflation disaster waiting to happen. Bank of Canada’s choice.
Canadian real estate’s contribution to GDP slipped again in May. The Real Estate, and Rental and Leasing component of GDP contracted 0.4% in May, following an 0.8% decline in April. One big area impacting the sector was revenues through real estate brokers. It basically means fewer commission dollars, a result of the slowing home sales. Since the sector is such a large part of the economy, it’s going to be a drag on the recovery data.
Toronto Real Estate
Greater Toronto home prices are seeing price growth slow, and the city pull back. The price of a typical home reached $1,054,300 in July, up 0.38% ($4,000) from the month before. In the City of Toronto though, the benchmark fell to $1,102,600, down 0.33% ($3,600) over the same period. This implies most growth is occurring in the 905 regions, as home prices flatten. Generally, this is a sign of a bubble. It means people are no longer prioritizing amenity access as a premium. They’re just paying for anything they can currently afford.
Global Real Estate
The New Zealand Government recently gave its central bank powers to slow home prices. Last week the Reserve Bank announced their intention to act this fall. In October, they’ll discuss tightening mortgage credit, installing debt ratios, and creating an interest rate floor. Full details won’t be released until the meeting, but warning shots were fired. The warning details were likely intended to set expectations to slow price growth. Slowing price growth ahead of finalization means less severe measures are needed.
Wuhan, China might be pioneering a new system to curb speculation. The metropolis is looking to create a “housing ticket” system to stop speculators. Prospective home buyers would need to apply for a ticket. If approved, that ticket would allow for the purchase of just one home for their household. No ticket, no home.
Thinking of circumventing the system? That would land you on the banned list, delaying your ability to purchase for a year. Additionally, you land yourself on a “dishonest person” list, which can’t be good. Ditto for developers that try to help people circumvent the rules. They also go on the industry blacklist. The move comes during a national agenda to curb housing speculation.
Like this post? Like us on Facebook for the next one in your feed.