Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Global real estate prices are forming a bubble, and a big economics firm sees it popping soon. An Oxford Economics analysis shows global home prices are 10% above the long-term trend. Using a fundamental like price-to-rent ratio, prices are 11% higher than they should be. Not all places are equal in this overvaluation though.
Canada ranked as the second-largest bubble in the world. Larger bubbles are expected to pop more quickly due to the “duration effect.” The longer it doesn’t pop, the larger the liabilities produced become. More bluntly, the ticking time bomb gets larger and more destructive.
The whole world is a bubble, but few places are as bubbly as Canada these days. Global home prices increased 1.57% in the first quarter of 2021, and are up 5.85% from the same quarter a year ago. Canadian home prices grew 5.6x that in the first quarter, and 3.5x the rate over the past year. This isn’t a recent trend either. Since 2005, Canadian home prices have grown 7.5x the global rate.
Canadian new home prices are growing at the fastest rate in over a decade. Prices climbed 0.6% in June, and are now up 11.9% from a year ago. Stat Can points to a slowdown, pointing out two consecutive months of declining growth.
What they didn’t highlight is that the annual growth reached the highest rate since 2006. Further, if the market doesn’t slow down substantially in July, it beats the 12% record. It might be slowing down, but we may potentially see a few more records first.
Canada is revising the way it calculates inflation, and giving shelter more weight. CPI-Shelter will go from 27.36% of the basket’s weight to 30.03% this year. For years people have been complaining that inflation doesn’t reflect rising shelter costs.
The timing of the change is more likely to reduce inflation at this point though. It will magnify shelter costs just after record gains, emphasizing a cooldown. This can actually provide more reason to keep rates lower, helping to prop up prices. Had they done this a few years ago, it would have had the opposite impact, promoting higher rates. Funny how that timing works.
Canadian real estate markets are seeing price growth slow after its record run. Last month saw 27 of the 48 major Canadian markets report lower annual growth than the month before. The trend will become more widespread, with 35 markets seeing annualized 3-month growth fall below the annual rate. This means recent performance is falling and will drag the market lower.
Canadian businesses are expecting one of the biggest price hikes in the cost of goods over the next year. A BMO analysis shows people expect prices to grow almost 5% over the next year. The size of the increase is much larger than anything previously forecast. The big bank said the relationship between expectations is also a strong fit. In other words, prepare for higher prices soon.
Canadian banks have seen the number of mortgages grow at the fastest rate in over half a decade. CBA members reported 4,948,248 mortgages in April, up 2.5% (121,500) from last year. Growth in the number of mortgages, not the dollar amount, hasn’t been this high since 2014.
Canadian mortgage debt grew at the fastest rate in over a decade, even with the decline in home sales. The balance reached $1.7 trillion in May, up 8.3% ($131.7 billion) from the same month last year. Annual growth is now rising at the fastest rate since 2010, and may have enough steam to push it further.
Canadian real estate sales are falling much faster than inventory these days. Seasonally adjusted existing-home sales came in at 50,810 in June, down 8.4% from the month before. New listings came in at 86,632, down 0.7% over the same period. That works out to sales falling at roughly 12x the rate of new listings. Buyers are dropping out of the market much faster than sellers.
Canadian household incomes barely kept up with inflation, shows newly released tax filer data. Households had a median after-tax income of $54,790 in 2019, up 0.6% from a year before. From 2014 to 2019, the rate only increased 3.4%. In contrast, home prices grew over 5x that rate in 2019, and 38.6% faster from 2014 to 2019. Is supply and demand the issue with affordability? More like stagnating wages.
Canadian homebuyers are disappearing faster than sellers, and it’ll remove price pressure. The seasonally adjusted sales to new listings ratio (SNLR) reached 69.2% in June, down 5.9 points from a month before. Considering the ratio was 90.9% in January, conditions are loosening very fast. Historically after the SNLR peaks, price growth peaks 4 to 6 months after. That would mean growth would taper between April and July. Hey, that’s this month!
US Real Estate
US existing-home sales climbed, but inventory pressures are finally starting to release. The seasonally adjusted annual rate (SAAR) for home sales reached 5.86 million in June, up 1.4% from a month before. It was the first month since January to see home sales rise, but it came with better inventory levels. The number of months of inventory increased to the highest level since June 2020.
The majority of the market’s home price gains in the past year have been made in 2021. That’s mostly due to inventory falling to very low levels. While inventory is still low, it’s closer to early pandemic levels. This should loosen pressure on home prices to rise.
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