Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
OSFI, the country’s bank regulator, has mentioned combined loan plans (CLPs) are a systemic risk. Mainstream discussion of the issue was largely void though, as it was unclear how big of a problem it had become. Our analysis shows outstanding CLP balances surged 50% between 2019 to Q3 2023. As a share of residential real estate lending, CLP debt has increased 5.6 points to 42.5% of the total outstanding debt. Nearly 1 in 3 dollars of CLP debt is also to households with high utilization, which tend to be incapable of handling shock. Another low rate shock may drive this share to over half of lending.
Canadian real estate sales continue to soften while inventory rises further. The combination drove prices 1.7% lower last month, with November’s demand balance the worst since 2008. Only half the impact of higher rates is believed to have tricked to market, but it’s already having a significant impact on repricing housing.
Last week, Toronto Fire Services were called to the site of a recently completed $13 million mansion. Toronto police are now looking for 4 suspects caught on camera setting fire to the home. The arson is the latest in a trend of new homes being set on fire. Greater Toronto has seen the problem become so bad, a major insurer has put out a warning to homebuilders, with premiums expected to rise.
Canadian real estate is now the second least affordable in history, according to BMO. The bank’s affordability index shows a typical household buying a home would need to spend a whopping 55.2% of their income on mortgage payments. This is now worse than the 90s bubble, and only surpassed by the early 80s. Affordability anywhere near this bad has always been followed by a serious recession.
Canadian mortgage rates are unlikely to go higher, but they won’t pull back to 2019 levels. That was the take from BMO Capital Markets, who’s forecasting 4 cuts next year. With a neutral rate 20% higher than pre-pandemic, don’t expect cheap mortgage debt anytime soon. It won’t even fall back to 2019 levels, nevermind the 2020-level that sparked a low rate, investor frenzy.