This Week’s Top Stories: Banks See Canadian Real Estate Bubble Risks Soar, While Other Countries Move To Cool Markets - Better Dwelling | Canada News Media
The Bank of Canada is embracing fast rising home prices, but that’s not a normal reaction. Especially at this time, in markets with overheated real estate. In France, they’re lowering leverage for buyers, cutting mortgage lengths, and service ratios.
South Korea is going further, looking to limit debt and make speculation unprofitable. The country is even banning mortgages in certain overheated markets.
New Zealand is working together with their central bank, to limit speculation. The government has even openly stated they will be targeting investors.
Monetary policy is often globally linked, injecting cheap money at the same time. However, each country has local issues that need to be addressed differently. Canada embracing higher home prices along with unemployment is a sign it doesn’t have a real economic plan.
BMO is warning about bubble risk, and it’s very different from the alarms others rang in 2017. Back then, BMO believed the foreign buyer “mini bubble” price jump was manageable. Today, if mortgage rates rise, it won’t be.
If rates rise to pre-pandemic levels, real estate affordability hits a “classic bubble.” If rates stay the same, and prices continue to rise, it hits that level next year. All roads lead to unsustainable price levels.
Canadian real estate prices are seeing synchronized growth, often a sign of a bubble. Synchronization risk is when local factors are dismissed, and prices all move together. When this happens, buyers dismiss regional differences. Instead, they often just buy because others are. They feel silly for even thinking about risk prior to seeing their peers thrive.
The problem with synchronized risk is, it makes a whole asset class vulnerable to shock. A single unexpected shock can have a ripple effect across multiple markets at once. You’re no longer worrying about issues in Toronto – it’s the whole country.
The free market does a great job at regulating borrowing risk. Rates rise when the picture is unknown, helping to reduce leverage for borrowers. Rates fall when the economy is booming, helping to increase leverage for borrowers. It’s a simple but effective process that capitalism uses to reduce exposure.
Now what happens when the state decides people should load up on leverage during a downturn? They eliminate the efficiency of markets, and create moral hazard. Buyers now think if they can send home prices higher during a downturn, surely they won’t let the market crash. Assets are now being bid higher, with the belief the state will intervene in any downside.
Capitalism doesn’t exist without risk. Instead, we’ve adopted a system where the state decides who the winners and losers are. Unfortunately, it seems the state picks the same winners every time. It would be great, if people weren’t on the other end of those economic inefficiencies.
Canada is in its 19th quarter of “exuberant” territory, according to the US Federal Reserve. This is when buyers disregard fundamentals, and pay emotional premiums. Fed researches set out to find a “smoking gun” for housing bubbles after the Great Recession. This research is the result of their findings.
Real estate markets are “exuberant” when they have 5 consecutive exuberant quarters. Researchers believe after 5 quarters, the market is inefficient and requires a correction. Canada has done 19 consecutive quarters, or just under 5 years. That’s only 3.5 years if you don’t count the qualifying period. The bubble hasn’t persisted for as long as many think, meaning this hasn’t been a long-term reality. It only feels that way.
Canada’s largest bank thinks rates may rise faster than current BoC guidance. They see the central bank revising forecasts if the economy continues at this rate. A senior economist at the bank said he’s watching for a reduction in QE in April. If the central bank does taper its purchasing, it’s a reduction in ease. A reduction in easing would be a strong sign things are improving faster than they had forecast.
The Bank of Canada made their rate announcement this week, which was widely expected to hold – and it did. Not much of an event, but the notes that accompanied were more interesting. The central bank said they were surprised by real estate demand.
They also reiterated a commitment to flatten the yield curve, to keep cheap money flowing. That might be easier to say than do, considering suppression isn’t effective against inflation driven yields. However, that’s a totally different discussion for another day. Read More
Concerns that you can’t get people to borrow during a recession are out the window in Canada. In fact, households are now borrowing at a faster rate than before the pandemic. Households had $1.65 trillion in residential mortgage debt in Q4 2020, up 7.1% from a year before. The increase is the fastest rate of growth since 2011, smashing exuberance seen in the past 5 years.
Canadian mortgage delinquencies are down almost everywhere in the country. Only six major real estate markets saw an uptick in mortgage delinquencies. Another 26 major markets saw the rate fall. The delinquency rates were widely expected to drop, considering deferrals.
However, things might already be changing in the post deferral world. CIBC’s latest quarterly report was only a month later than the above numbers. The data showed Toronto’s uninsured mortgage delinquency rate was 70% higher. It could be a one off, or it could be a new trend. Who knows, but Big Six banks typically see lower arrears, not higher.
Canada’s work-from-home trend may be forcing some developers to hit pause. Cheap money sent construction investment soaring across the country. Almost all of the growth is in the residential segment though. Despite commercial developers also benefiting from cheap cash, they haven’t scaled much. Clearly, this doesn’t have anything to do with a lack of money. Instead, they’re most likely waiting to see if work-from-home sticks. If it doesn’t, this might actually cause a squeeze in office space.
BC’s foreign buyers are down, but the few remaining are looking outside of Vancouver. In January, only 22.63% of non-resident real estate purchases were in Greater Vancouver. To contrast, that number was 60% a year before. Either affordability is impacting those wealthy enough to have second homes, or investors are following locals into more affordable markets.
TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.
The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.
The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.
“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.
“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”
The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.
New listings last month totalled 15,328, up 4.3 per cent from a year earlier.
In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.
The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.
“I thought they’d be up for sure, but not necessarily that much,” said Forbes.
“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”
He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.
“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.
“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”
All property types saw more sales in October compared with a year ago throughout the GTA.
Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.
“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.
“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”
This report by The Canadian Press was first published Nov. 6, 2024.
HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.
Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.
Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.
The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.
Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.
They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.
The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.
This report by The Canadian Press was first published Oct. 24, 2024.
Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.
Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.
Average residential home price in B.C.: $938,500
Average price in greater Vancouver (2024 year to date): $1,304,438
Average price in greater Victoria (2024 year to date): $979,103
Average price in the Okanagan (2024 year to date): $748,015
Average two-bedroom purpose-built rental in Vancouver: $2,181
Average two-bedroom purpose-built rental in Victoria: $1,839
Average two-bedroom purpose-built rental in Canada: $1,359
Rental vacancy rate in Vancouver: 0.9 per cent
How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent
This report by The Canadian Press was first published Oct. 17, 2024.
