Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canada’s Oldest Bank Begs, “Could we PLEASE Stop With This Supply Myth?”
One of Canada’s most prominent economists is getting tired of the false supply narrative. BMO chief economist Douglas Porter explained the supply narrative is vastly overstated. In an analysis to their institutional clients, he rebutted a chart used by the Federal Government to “show” tight supply. He argues the chart itself shows the opposite of their point, highlighting that the US has less supply. In Canada, home prices are still 60% higher than in the US.
Landlord Nation: Over 1 In 6 Canadian Homeowners Own Multiple Properties
Canada is a nation of real estate investors, shows land registry data. Stat Can data shows provinces have seen up to 1 in 5 homeowners buy multiple homes. The share of housing stock owned by investors is also up to 40% at the provincial level. More housing held by investors is a strong indication of price growth expectations. It also makes markets more vulnerable in a downturn.
Canadian Real Estate Prices Have Little Upside Potential But Can Drop 30%: Moody’s
Canadian real estate’s epic run over the last two years is running out of steam. Global credit rating giant sees a 3% drop in home prices if things keep humming along. If things pick up, the bull case could be another 10% increase in prices. On the downside, prices can fall up to 30% if the rising rate environment turns into a recession.
The Canadian Government’s Housing Plan Makes No Sense and “Won’t Happen”: BMO
BMO, one of Canada’s “Big Six” banks, isn’t confident in Canada’s new housing plan. The Federal budget outlined ambitious (and arbitrary) plans to double new housing supply. BMO argues the comically large goal is near impossible for many reasons. A few include a lack of materials and labor, Canada can’t even grow trees fast enough for this level of building. In addition, Millennials will be approaching 50 by the time this goal is hit. This is way past the demographic peak, and decades before the next.
A Typical Canadian Mortgage Went From Less Than $300k to Over $600k In Five Years
Canadian mortgages have increased substantially over a very short period. The share of originations over $600k reached 23.8% in Q4 2021, up from 11.6% five years before. This size of mortgage is now the most frequent of the distribution ranges. Five years ago, it was mortgages between $200k and $300k, now at a record low. Over just a short period of time, Canadians normalized borrowing twice as much debt. Not in pricey cities like Toronto or Vancouver, but right across the country.
Canadian Variable Rate Mortgages Are Climbing, Expected To Hit 4% By Next Year
Variable rates mortgages are forecast to surge higher with interest rates. BMO estimates the interest on a variable variable rate mortgage hit 2.25% this week. This comes after the Bank of Canada (BoC) raised the overnight rate by 50 basis points (bps) this week. It’s already a sharp climb for borrowers that had been paying 1.5% at the start of the year, but they’re about to see even higher rates. Variable mortgage interest cost is forecast to reach 3.25% by mid-July and 4% by the beginning of next year.
It Wasn’t Transitory: Bank of Canada Raises Its Inflation Outlook…Again
Even the Bank of Canada (BoC) might not believe inflation is transitory as its own forecast climbs. The central bank raised its guidance for annual CPI to average 5.3% in 2022, up from their 4.2% estimate two months ago. The following year also saw the forecast reach 2.8%, up from 2.3% in the previous estimate. The central bank no longer sees inflation cooling to the 2% target until 2024.
Bank of Canada Moves to Control “Excess Demand” By Raising Rates, Implements QT
The Bank of Canada is moving to slow “excess” demand in this economy. This past week, they raised the overnight rate to 1.0%, up 50 bps from the previous year. It’s not quite as high as it was at the start of 2020, but it’s getting there. Also announced this past week, quantitative tightening (QT) will start this month. QT will gradually reduce excess liquidity injected into the system.
Canadian Mortgage Rates To Surge, Demand Will Be Slowest In Recent History: Moody’s
Canadian mortgage rates are forecast to hit the highest level in a decade. By the end of the year, Moody’s is forecasting a 4.25% 5-year fixed rate, which will continue to rise to 5.5% by 2024. The last time rates were this high was in 2009, during the Great Recession. At this level, they expect the demand for mortgages to cool significantly.
