Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
The Canadian property bubble reached the contagion phase, spreading to other areas. Real estate bubbles often spread from the city center to the suburbs. Investors move to regions with cheaper prices, often looking for bigger gains. As the issue becomes more widespread, the odds of a financial crisis rises. It’s no longer a city issue, but impacts whole economic regions.
That is the phase Canada is currently in, even highlighted in the Bank of Canada research. They found home prices in Toronto and Vancouver suburbs are growing at a faster rate than in the city. The assumption is that the pandemic changed consumption habits, and this time is different. Except newspaper archives are filled with articles on urban flight during bubble peaks. Apparently, People suddenly feel the need for more space during every bubble. It’s always different this time. Except when it isn’t.
Canadian mortgage rates are forecast to rise over 40%, with the posted rate hitting up to 7%. Desjardins released its forecast range over the next few years. It shows mortgage rates are more likely to rise than fall within 3 years. This is especially true if the economy keeps its booming pace of growth. While no one has ever paid the posted rate, it can impact things like the penalties and the stress test. Since the posted rate rises with the discount rate, borrowers are likely to pay more as well.
Canadian mortgage debt reached a new record high, but the size of growth is really the story. The balance of outstanding mortgage credit reached $1.69 trillion in April, up 7.8% ($122.25 billion) from a year before. Annual growth is advancing at the fastest rate since 2010. The dollar amount added over the past year is equivalent to 6% of GDP. QE wasn’t just effective at stimulating mortgage credit growth. It was so effective, mortgage debt is growing faster than it was during the best economy.
Canadian population growth is showing signs of stabilizing, but has a long way to go to get back to normal. The population increased 0.2 percent in the second quarter of 2021, and made an annual increase of 0.4 percent. While the quarterly increase is close to historic levels, the annual one is less than a third of the prior year. BMO said, “if inflows remain subdued for long, underlying demand will cool (for housing and goods), while labor supply will be constrained. Bears watching.”
Ontario is losing residents to other regions at a rapid rate. Ontario’s net-interprovincial migration shows 5,629 more people left the province than arrived. It was the largest net loss to other provinces in the country. BC and Nova Scotia showed surprising gains, seeing the largest net inflows in the country.
The Canadian bank regulator is asking its Big Six banks to put aside some extra cash. At the beginning of the pandemic, OSFI cut the domestic stability buffer (DSB) to 1 percent. This freed up $300 billion in additional lending capacity. Now they’re asking banks to prepare for the DSB to rise to 2.5% this October. The regulator is throttling lending capacity as household debt presents a vulnerability.
One of the coldest forecasts for real estate is coming from the industry this year. CREA increased its average sale price forecast to $677,774 for 2021, up 19.3% from a year before. Most media took note of the 2.8 point hike in growth from their March forecast, but missed the dollar value. The agency is forecasting a lower number than last month’s year-to-date average price. They also lowered next year’s forecast, indicating this year borrowed future demand.
Soaring Canadian real estate prices haven’t contributed much to inflation, but that’s changing. CPI monthly growth came in at 0.4 points, with annual growth of 3.6 points, well above the 2.0 point target. The second-biggest driver of inflation was shelter costs. Economists have said rising shelter costs will hit inflation in a delayed manner. They also warned not to expect it to reflect the full increase in cost many are experiencing. Now it’s here, a little late, and it certainly fails to capture what many are experiencing.
At the current rate of home price growth, it’s going to make a lot less sense to move to the suburbs, said BMO. The bank used Barrie as an example of home price arbitrage. A single-family home there pre-pandemic was about 54% of buying in Toronto. Just over a year later, that gap has closed by 8 points. A similar trend is observed in London Ontario. The bank’s economists warn if this continues too fast, the incentive to leave the city will fall. That would prematurely kill the ambitious plans of all these smaller cities.
The Canadian real estate industry is cutting its forecast for existing-home sales. The industry lowered its forecast to 682,867 home sales in 2021, an increase of 23.8% from the year before. It’s still a lot of growth, but the number is 19,100 fewer sales than they had expected back in March. That works out to billions less in residential real estate trade value.
Canadian home sales fell last month, as the market continues to cool from record volumes. Seasonally adjusted existing home sales fell to 56,156 in May, down 7.4% from the previous month. This is the second consecutive month to see home sales slide. This likely contributed to the industry revising its home sale forecast lower.
Canada’s urban housing starts climbed last month, but were below the March peak. The seasonally adjusted annual rate (SAAR) of urban home starts reached 275,916 in May. It’s an increase of 3.2% from the previous month, but a sharp drop from the March record of 333,283. It’s a lot of homes, averaging 1.8 per person the population has grown by over the past year. At the very least, this should really catch up on any perceived backlog.
Lumber prices are crashing, largely due to soft demand for new houses. Over the past 38 days, the price of lumber has fallen over 40% from its peak. The price dropped to US$996/mbf at the time of writing, and was the first time since mid-March it didn’t have a 4-digit price. Despite rising prices for new homes in the US, sales have made a sharp drop. This occurred just a month before the price of lumber began to tumble. Homebuilders being one of the biggest consumers of the commodity.
Ontario homeowners migrated across the province at an unusually fast pace. The fourth quarter of last year saw a 45.2% uptick of homeowners moving to new regions. October 2020 was also the record high for homeowner migrations. This trend was very strong in Toronto, where thousands of owners moved to other parts of the province. This last point helped create province-wide pressure on prices to move much higher.
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