It’s time for your cheat sheet on this week’s top stories.
Canadian real estate
Here’s how the Bank of Canada generated over 250,000 excess real estate sales
When inflation is below target, a central bank will cut interest rates to help stimulate “excess” demand for goods. The excess demand aims to exceed the existing supply and create inflationary price increases. In the case of existing home sales, the Bank of Canada stimulated over 250,000 oversales over two years to raise prices. The central bank says we “needed” the economic activity, but the benefits are far less than the problem created.
The mortgage mess in Canada caused by higher rates? It was just $61
Rising interest rates have economists worried about the impact of mortgage debt on the economy, but the risk is lower at low rates. In the second quarter of 2022, the average mortgage payment rose to $1,458 per month, up 4.5% (+$61) from a year ago. While that’s high, annual growth was 4.2% (+$55) per month in the second quarter of 2021. This year, the loss of disposable income due to rising mortgage rates is only slightly higher than rates last year’s record. At the same time, lower prices are expected to further slow growth.
Canada’s housing bubble is so big that households need 64% of their income for a mortgage
Canadian real estate has just experienced the worst erosion of affordability in four decades, but things should improve. National Bank of Canada estimates that an average family now needs 63.9% of their income just to pay off the mortgage on a typical home in the second quarter of 2022. That’s an increase of 10, 4 points from the previous quarter, the biggest since the 1982 inflation crisis. The bank says there are some positive signs on the horizon. They expect rates to peak soon, yields to stabilize and house prices to continue to correct.
Canadian mortgages will experience fewer payment shocks than some countries: Fitch
Globally, more and more mortgage borrowers have switched to variable rate mortgage products and the rising rate environment presents a sudden risk. Fitch Ratings has stress tested these markets and found that countries like Canada will see variable rate borrowers see a big increase in their debt servicing costs. However, since Canadians do not often hold variable rate mortgages, the increase in risk for the general mortgage market is less than the variation in risk in other countries. That’s not to say that Canada’s oversized mortgage debt isn’t at risk, but the rate hike itself doesn’t change much of the situation.
Canadian real estate is proving to be a story of excess demand, says BMO
Canadian real estate sales are in freefall, but this is largely just a normalization of activity, following overblown demand. Seasonally adjusted sales fell 5.3% in July, and non-seasonally adjusted sales fell 29.3% from the same month last year. BMO points to the fact that this is 40% below the peak, and finally below the 10-year average. They attribute the recent boom to excess demand from low rates and FOMO, with activity falling back to less stimulated levels.
Home prices in Canada fall another $27,000, average sale now in negative growth
Real estate prices in Canada recorded another sharp monthly decline. A typical home saw its price drop to $782,300 in July, down 3.4% (-$27,400) from the previous month. Prices remain 10.9% (+$76,700) higher than the same month last year, but at this rate those gains may evaporate quickly.
American real estate
US enters ‘housing recession’ as sales fall back to May 2020 levels
Sales of existing homes in the United States have recently fallen, falling to their lowest level in more than two years. The seasonally adjusted annual rate of home sales fell to 4.81 million units in July, down 5.9% from the previous month and 20% from a year ago. Sales haven’t been this low since May 2020, when public health measures were first rolled out. The NAR’s chief economist has gone so far as to call it a ‘housing recession’, even though price movements don’t reflect that…yet. It was also the first month in a long time to see a price drop, and that was significant.