This Week’s Top Stories: The Canadian Property Bubble Starts To Deflate, and Funds Are Buying Homes

Time for your cheat sheet on this week’s most important stories. 

Canadian Real Estate

The Canadian Property Bubble Can Start Deflating As Early As This Month

The Canadian property bubble is starting to show signs of deflating last month. The 3-month annualized rate of growth for prices is falling in Toronto and Vancouver. Since this leads the annual rate of growth, it’s pointing to a price slow down. Crunching the numbers, both markets need a massive jump in prices this month to reverse the trend. A monumental task, since the amount to grow is multiples of last month’s growth.

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The Bank Of Canada Has Been Studying If Telling People A Bubble Exists Makes It Worse

How do people react to finding out they’re buying in a bubble? Bank of Canada (BoC) researchers just conducted a study to find out. When participants were told the market was a bubble, it began to lower expectations of growth. This led to the stabilization of the market, minimizing losses before a crash.

They also found larger groups produced bigger bubbles, impacted less by the news. Larger groups found comfort in each other’s exuberance, making bubbles more difficult to pop. On a totally unrelated note, did we tell you about the BoC’s new bubble identification tool? 

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How Low Interest Rates Sent Institutions Like Blackrock Into Bidding Wars For Homes

Institutional investors are buying single-family homes, and becoming landlords. No, they aren’t getting ready to retire, but the people giving them money need to pay for your retirement. After the Great Recession, bond yields collapsed, destroying fixed income markets.

This forced funds, often funded by pensions, to look for fixed income replacements. One of those has been buying single-family properties in markets with high rental yields. Think Atlanta and Phoenix, where the yield is higher than typical bonds. Even if just slightly so. Buying in cities like Toronto or New York City may be great for price growth, however the yields are so low, it wouldn’t be a replacement for fixed income products.

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Canadian Real Estate In A “Bizarro” Scenario, Where Reopening Might Be Worse: BMO

Canadian real estate prices are in a “bizarro” scenario, said one of the country’s biggest banks. During the recession, home sales and prices unexpectedly soared. Now that the economy is recovering and reopening, the housing market is cooling. The bank now sees the potential for the market to do the opposite of what people expect, which would be “very housing” in 2021.

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Canadians Are MORE Bullish On Real Estate Prices After Record Gains: Bank Of Canada

A Bank of Canada (BoC) survey reveals households are more bullish on prices. Households now expect prices to rise a record amount over the next twelve months. They made their estimate while the market printed record growth.

It’s often thought that expectations are a leading indicator, but that might not be the case here. Previous data from similar surveys shows these are historically coincident indicators. That is, they expect prices to rise as they rise, and see them falling, as they fall. Most likely this has to do with the cohort of people.

If you’re not actually in the market or already own a home, it’s easy to have the opinion prices will soar. If you’re actually buying and doing the math, it’s a little tough to see down payments go past 40 years of savings.

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Bank Of Canada Will Get More Room To Hike Rates With US Fed Turning Hawkish: RBC

RBC sees the US Federal Reserve turning hawkish as good for Canada. Hiking rates and producing a loonie that was too strong against the dollar had been a previous concern. It can result in a hit to exports, while the economy is recovering. That would be counterproductive to a recovery. 

Now their forecast for the US to hike rates has accelerated, and much of the “strong loonie” pressure is disappearing. This will allow the BoC to hike rates with more ease, or even add another hike in there. Okay, they probably won’t add another hike. 

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CMHC’s New Management Moves To Protect Market Share Instead Of Borrowers

Good-guy CMHC tried tightened insurance conditions at the beginning of the pandemic. The state-owned mortgage insurance company was trying to help unprepared borrowers from jumping into the unknown. That didn’t stop their competitors though, who didn’t just avoid adjusting their criteria. They scooped the CMHC’s market share. 

The move had little to no impact on the way the market operated, and the mortgage industry thinks it was silly. Not lending a highly indebted person cash to gamble is seen as a bad move, if the person makes money. The CMHC is now loosening insurance standards to the pre-pandemic criteria. You may not be able to get financing for a Honda Civic, but you can get it to drop over half a million on a home in Canada. 

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Toronto Real Estate

Greater Toronto New Home Sales Fall Faster Than Inventory, Releasing Price Pressure

Greater Toronto’s new home inventory is low, but rising to more sustainable levels. The sales to active listings ratio (SALR) fell to 29.2% in May, which is substantially lower than the 43.6% seen in March. It still needs to fall below 20% before the market is considered balanced, meaning it’s still tight. However, the market is loosening fast, as buyers drop faster than sellers.

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Toronto Detached Home Prices Drop Over $11K In A Month, Everything Else Soars

Greater Toronto real estate prices are rising, it’s just a much cooler market in the City these days. The composite benchmark price of a home hit $1,050,300 in June, up 0.43% ($4,500) from a month before. The City of Toronto reached $1,106,200, rising just $300 from the month before. Weak growth in the City is due to the detached segment, where prices fell $11k in the month. A bit of an unusual situation, since the Greater Region’s home prices are accelerating. Though the City’s detached homes tend to lead the market. 

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Vancouver Real Estate 

Vancouver Home Prices See 5-Figure Monthly Drop, As Resistance Suddenly Appears

Greater Vancouver home prices moved higher, but the city saw some segments crater. For example, Vancouver East detached homes fell to a benchmark of $1,696,500 in June, down 0.8% ($13,700) from a month before. That’s a fairly substantial one-month haircut, especially considering how abrupt it was.

Greater Vancouver’s composite climbed higher, but zooming out it seems less impressive. The annual numbers were high, but the board points out relatively low growth over the past 3 years. The massive climb over the past year made up ground lost, unlike in other regions where it was just gains.

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