Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian homes are seeing buyers fall faster than sellers, and it’s leading to a market shift. The ratio of sales to new listings has fallen consistently since it peaked in January. By historic standards, annual home price growth falls 3 to 6 months after that peak.
Running the numbers, we show how likely growth is to start falling this month. Spoiler, it would take a monumental surge in prices to avoid last month from being the peak.
Canada’s property bubble is pushing people to consider leaving Ontario. A survey on housing affordability found 45% of adults between the ages of 18 and 29 considered moving to another province in the past year. That can spell major demographic issues for the province.
Having your young adults leave hits the economy by taking entry-level talent elsewhere. The return expected from investing in young people is now in the domain of other regions. For now it’s still within Canada. Inevitably high-income and skilled workers will consider higher-income countries like the US. That’s when brain drain is no longer a provincial issue, and shifts to a national one.
That’s not the only sign of a market slowdown, recent price growth is slow as well. The 3-month annualized rate of growth for the benchmark fell to 18.1% in June. This is significantly below the 24.7% growth seen for the 12-month rate. Annual growth is accelerating by momentum, not recent performance. Data shows last month might have been when that momentum started to wear out.
Recent home buyers are pushing their budgets as far as they can, found a recent survey. The CMHC survey found 65% of recent buyers spent the most they could on their home. This is far from normal in Canada, where only first-time buyers typically max out their budget. If existing owners, who have a ton of equity from the boom, need to max out their budget, it’s a problem. This is often a sign of buyer’s gridlock, where everyone is stuck in their current housing.
Canadian new vehicle sales are slowing from the recent surge higher. Sales came in at 151,912 new vehicles sold in May, down 8.9% from a month before. It was the slowest May for new vehicle sales going back to 1997.
The microchip shortage is one possible cause, but it doesn’t change the impact. Fewer sales mean worse performance for one of the biggest segments of manufacturing. That has a trickle down effect, slowing down whole economic regions. Considering the surge in used vehicle prices as well, many buyers won’t be pent-up demand in a few months.
The Bank of Canada is further tapering a program that helped to push home prices higher — much higher. The central bank will taper their QE purchases to $2 billion per week, down from the current $3 billion. It’s now half the amount they were buying at the beginning of the year.
QE is a controversial central banking policy designed to push interest rates lower. It’s used when inflation is low, and they want to push it higher by stimulating demand. By using QE, they can push the cost of borrowing even lower than where it would be with a cut to the overnight rate. It would be great, if it didn’t also cause asset price inflation and rising inequality. But at least bread is free to rise 3% from last year’s prices.
Canadian real estate prices are soaring, and it’s largely due to small towns taking the lead. The RPS National 13, a composite of the 13 biggest cities, hit a typical price of $803,261 in June, up 17.5% from last year. The National 3500, which tracks 3,500 cities and small towns, hit $734,000, which is an increase of 19.4% from a year before. Big cities may be more expensive, but small towns have been catching up fast.
Canadian households saved a whack of money during the pandemic. It’s widely believed it will lead to “revenge spending,” a surge in consumer demand. Oxford Economics ran the numbers, and found the savings are much smaller than most think.
The firm estimates only $100 billion of the $184 billion of excess gross savings are liquid. Of those, half the amount is held by households in the top two quintiles of income. Wealthy households are less likely to have consumption influenced by extra cash.
Canadian investment in building construction made an unexpected dip in the latest numbers. Seasonally adjusted construction investment fell to $19.4 billion in May, down 1.9% from a month before. Residential investment, a big GDP driver, was responsible for the whole drop. It’s healthier in the long run to see diversification, but at this concentration, it can be rough in the short term.
A lot of Boomers still have children living with them, and the rate is even higher in expensive cities. The Royal LePage Boomer Survey found 20% have children living with them across Canada. A third of Boomers with kids at home also never expect them to leave.
Over in pricey Vancouver and Toronto, the rate of Boomers with kids at home is even higher. In Vancouver, the number jumps all the way up to 28% of Boomers with children living with them. Toronto is a little behind, with 26% of the city’s Boomers living with children.
Lumber prices continue to spiral lower, after fetching an absurd premium just a few weeks ago. The price of lumber closed 10% lower than a week before, at the time the article was written. It’s a drop of 28.4% from a month before, and 57.7% lower than the record high reached in May. The industry attributed the fall to several reasons, including commercial buyers just waiting until prices fall.
Global Real Estate
The central bank is dropping its QE program nearly a year ahead of schedule. The country’s central bank planned on spending NZ$100 billion (US$70 billion) on QE, until June 2022. Now they’re ending the whole program having bought significantly less. The central bank’s meeting minutes show they believe the risk of deflation is now low. On the other hand, the risk of high inflation has become problematic.
The central bank was recently ordered to consider housing affordability when setting policy. While they didn’t attribute the decision to end QE to home prices directly, it was most likely a factor. They went from rarely discussing home prices, to calling them “unsustainable.” Bold words for a central bank to use.
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