DATE

Steve Saretsky -

“When the value of one asset outpaces the economic production of an economy, at some point, it has to end. The dream will become a nightmare.” Those were the stark words from the head of Canada’s Mortgage & Housing Corporation in his latest interview with Yahoo Finance. The often outspoken Evan Siddall worries continued intervention and promotion of home ownership is blowing an unsustainable debt bubble, that will eventually propel prices lower once it pops. “The problem is that we’re in a game of musical chairs and when the music stops playing, it’ll be young first-time homebuyers who are holding the bag.” Siddall and his CMHC employees maintain their view on a house price correction between 9-18% over the coming year. However, like many housing bears who have called for the catastrophic end to the multi-decade run-up in home prices, those warnings haven’t seem to slow the nations impenetrable housing market. Housing sales are on the rise, and so too are prices, at least for single family homes on the outskirts of the city. Bidding wars are ravaging suburban towns as work from home orders push people further away from the city. Armed with record low mortgage rates and a sea of

Steve Saretsky -

The Bank of Canada was back at it with their latest views on the direction for monetary policy. The latest dove at the helm, Tiff Macklem, signalled his commitment for a zero interest rate policy, and unprecedented levels of Quantitative Easing. Both interest rates and QE are here to stay, until the recovery is well underway, and that will take at least a few years. In other words, as Macklem so eloquently put it, “Interest rates are very low, and they’re going to be there for a long time. We recognize that Canadians, and Canadian businesses are facing an unusual amount of uncertainty, and so we have been unusually clear about the future path for interest rates. So If you’ve got a mortgage, or if you’re considering to make a major purchase, or you’re a business and you’re considering making an investment, you can be confident that interest rates will be low for a long time.” In central bank lingo, they call this forward guidance. On main street, we call it a green light to lever up on cheap credit. Borrow to your heart’s content. It’s a slippery slope, however. Canada currently ranks third amongst the G-20 in terms of private debt

Steve Saretsky -

I must admit, people bidding up house prices amidst the deepest recession in living memory is something I definitely did not see coming. Segments of the Real Estate market remain red hot across much of Canada, although mostly for single family homes. It’s certainly a head scratcher, and defies all rational logic. However, as the old saying goes, “60 million Frenchmen can’t be wrong.” Essentially it is based on the idea that the crowd is collectively smarter than any one individual. This collective intelligence was first stumbled upon by the late great statistician, Francis Galton, who in 1906 observed a competition at a local fair where approximately 800 people tried to guess the weight of an ox. To his surprise, the average of all the guesses was 1,197lbs. The real weight was 1,198lbs. Countless studies have been done since, all showing similar results. Herd following has been a key success for legendary investor George Soros. Soros, who is considered one of the greatest investors of our times has been quoted as saying, “Being so critical, I am often considered a contrarian. But I am very cautious about going against the herd. I am liable to be trampled on. Most of the

Steve Saretsky -

After publishing the industries most bearish housing forecast, which called for a slump in property prices between 9-18% over the coming twelve months, CMHC delivered another blow to the real estate sector. This time, announcing they’ll be choking off credit for Canada’s most levered home buyers. Effective July 1, CMHC will lower both gross debt service ratios and total debt service ratios, pushing minimum credit scores higher, and eliminating sources of down payment that increase indebtedness. “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.” n other words, CMHC is making good on its own forecast by directly reducing credit flowing into real estate. These changes result in a 10-11% reduction in how much one can borrow for the purchase of home using an insured mortgage, ie home purchases under $1M using less than a 20% down payment. The moves are not insignificant, as nearly 1 in 3 new mortgage originations in Canada are insured.

Steve Saretsky -

Love him or hate him, Bank of Canada Governor Stephen Poloz is on the way out. Poloz has been lauded for his near perfection in managing inflation, earning him the Central Banker of the year award in 2018.  During his tenure, the Consumer Price Index has stayed within the central bank’s comfort zone for inflation 92% of the time, a better record than any governor since the central bank started targeting inflation in the early 1990s. However, there are certainly debates over the accuracy, or for that matter the relevancy of the consumer price index, which tends to disguise real inflation for you average hard working Canadian. In fact, if you were to ask any young or middle age citizen how much, on average, the cost of living was rising each year, you’d most certainly get an answer higher than 2%. Once dubbed “The Candyman”, Poloz’s lower for longer stance on interest rates encouraged household debt levels to reach unsustainable levels, and allowed house prices to detach from incomes. Both of which have reached a point of no return. I’ll be the first to admit, Poloz was merely following his Central banking peers, caught between a rock and a hard

Steve Saretsky -

A quick updated on the Vancouver housing market here. I have been tracking data on a weekly basis for the Bank of Canada. It’s unquestionably difficult to try and discern any trends in the Real Estate market on a weekly basis, but we are starting to get a sense of how buyers and sellers are behaving. Weekly sales over the past four weeks have averaged 43% lower than last years levels. That is incredibly weak considering last April/May was the slowest in nearly two decades. However, new listings are also very low, at the beginning of April they plunged 65% and have since been steadily increasing as the number of COVID-19 cases slow. As quarantine measures ease, new listings are picking up. They have increased for three consecutive weeks. New listings are outpacing sales, and this has pushed the months of inventory for sale higher. There is currently 7.4 months of inventory for sale, indicative of a buyers market. Prices are all over the place, as should be expected when volumes collapse. Ironically, condos, which were the hottest segment of the market pre-virus, are now seeing the most downwards pressure in terms of pricing. I have condo prices down about

Steve Saretsky -

In his final press conference before stepping down next month, Bank of Canada governor Stephen Poloz went out with a bang. Sunny Steve painted a more rosy outlook, suggesting recent concerns are overblown. “We have to be able to manage the risks around those things, so I’m not going to dismiss dire scenarios”, Poloz said during a media roundtable, conducted online. “But, me personally, I do think on balance what I’m hearing, the flow that I’m hearing, is a little too dire, a little bit overblown.” It was just a few months ago, Poloz gave the all clear, suggesting the economy was close to “home” as he prepared to sail off into the sunset. Since then, the Bank of Canada has pumped $300B of cash into the financial system, more than tripling their balance sheet during their first foray into Quantitative Easing. Actions speak louder than words. While Sunny Steve has been relieved of his duties, there is still a lot of cleaning up to do. CMHC boss Evan Siddall notes that 12% of all mortgages are currently in deferral, and that number could rise to 20% by September. Further, due to the outright collapse in economic activity, household debt

Steve Saretsky -

As anticipated, national home sales came to a screeching halt in April. Home sales across Canada plunged both 57% on a year-over-year and a month-over-month basis. In other words, either way you want to slice it, it was the slowest April on record, dating back to 1984 when our population was one third smaller. Thankfully for the housing market it was in a strong footing prior to the pandemic, with relatively low levels of inventory. There was just 4.3 months of supply for sale in March, although that figure, which measures how long it would take to liquidate current inventories at the current rate of sales activity- has now ballooned to 9.2 months in April. he question everyone wants to know now is when, and perhaps how much, will home prices fall? Of course that is an impossible question to answer. Yet there seems to be no shortage of predictions today. I have to laugh and feel somewhat empathetic to the economists who are trying to model home prices. According to CMHC, in a best case scenario national home prices will rebound to their pre-virus levels at the end of 2022. On the other hand, I read a report from

Steve Saretsky -

About 12% of all mortgages are now in deferral per Evan Siddall of CMHC. This includes both insured and uninsured mortgages, and that number could balloon to 20% by September, noted Siddall in a speech to members of the finance committee. Furthermore, its expected household debt to GDP ratios will blow out in the coming quarters. Canadians are among world leaders in household debt. Pre-COVID, the ratio of gross debt to GDP for Canada was at 99%. Due in part to increased borrowing but even moreso to declines in GDP, we estimate it will increase to above 115% in Q2 2020 and reach 130% in Q3, before declining. These ratios are well in excess of the 80% threshold above which the Bank for International Settlements has shown that national debt intensifies the drag on GDP growth. As a result of elevated levels of household debt and a surge in unemployment, CMHC estimates national home prices will decline between 9-18% in the coming twelve months as they meet a growing debt “deferral cliff” that looms in the fall. In the chart below, we can see the majority of CMHC insured mortgage deferrals are concentrated in Quebec, Alberta, and Ontario. IIF stands

Steve Saretsky -

We received a rather horrifying glimpse behind the curtain this past week, as the number of unemployed Canadians reached levels not seen since 1982. Two million jobs evaporated in April, pushing the official unemployment rate to about 13%, nearly triple what it was a few months ago. Even more heartbreaking, these numbers are grossly underreported. Per Stats Canada, those who were employed but worked zero hours or who lost their job and have simply stopped looking for one, are not counted towards the official unemployment rate. Some estimates suggest the real unemployment rate is around 30% today. Like in every recession, the economic pain is not dispersed evenly. Employment for workers aged 15-24, also known as Gen Z, dropped by 22%. Generation Zers who are entering into the workforce now face lower lifetime earnings. Historic data shows young people who graduate during a recession earn on average 10% less than cohorts who graduated when the unemployment was lower. This can result in longer periods of student debt and delays in buying a home and starting a family. Employment among very recent immigrants (five years or less) fell more sharply from February to April (-23.2%) than it did for those born in Canada (-14.0%). Furthermore, as

Steve Saretsky -

News on the Coronavirus front has been getting better, and there appears to be some light at the end of the tunnel. As we brace for a possible re-opening in the next few weeks, there is a lot of talk within the real estate industry about the direction of the housing market. Nearly all of those discussions focus on the idea of “pent-up demand”. This belief that a swarm of eager buyers, finally released from their quarantine shackles, will be tripping over themselves to snatch up condos, thanks to a flood of cheap credit and a lack of supply. But what if demand remains impaired? While the virus may be fading, it is still very much with us, and it seems it will be here for the foreseeable future. All this talk about money printing and stimulus saving us all, as if we can simply paper over a wave of insolvencies. The reality is many businesses will not survive, as John Mauldin of Mauldin Economics recently noted, unlike manufacturing, retailing, or agriculture, service businesses can’t hold inventory. They can’t just close for a few weeks and then make up the lost time. There is no second chance to sell that

Steve Saretsky -

I wanted to provide a quick update here on the housing market. I have been tracking activity on a weekly basis and working with some policy makers to keep them up to date. Obviously everyone is trying to get a handle on what the future will look like. Right now I have monthly sales for Greater Vancouver tracking at 1100 for the month of April. That would put sales down 40% on a year-over-year basis. That doesn’t sound completely terrible, although keep in mind April 2019 sales were the lowest since the year 2000. So yea, at 1100 sales that would be the lowest in history for April. New listings have also catapulted off a cliff, and should finish the month down about 60% on a year-over-year basis. Here’s how the supply demand picture has been shaping up. Even though new listings are way down, months of inventory for sale is building, growing from 3.5 to 7 months of supply in the past four weeks. That puts in a buyers market, and we are seeing prices negotiated lower, albeit only by a couple percent. There’s certainly no panic at the moment, although things will get more interesting as mortgage deferrals

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The Canadian Economy

Steve Saretsky -

“When the value of one asset outpaces the economic production of an economy, at some point, it has to end. The dream will become a nightmare.” Those were the stark words from the head of Canada’s Mortgage & Housing Corporation in his latest interview with Yahoo Finance. The often outspoken...

Steve Saretsky -

The Bank of Canada was back at it with their latest views on the direction for monetary policy. The latest dove at the helm, Tiff Macklem, signalled his commitment for a zero interest rate policy, and unprecedented levels of Quantitative Easing. Both interest rates and QE are here to stay,...

Steve Saretsky -

I must admit, people bidding up house prices amidst the deepest recession in living memory is something I definitely did not see coming. Segments of the Real Estate market remain red hot across much of Canada, although mostly for single family homes. It’s certainly a head scratcher, and defies all rational...

Steve Saretsky -

After publishing the industries most bearish housing forecast, which called for a slump in property prices between 9-18% over the coming twelve months, CMHC delivered another blow to the real estate sector. This time, announcing they’ll be choking off credit for Canada’s most levered home buyers. Effective July 1, CMHC...

Steve Saretsky -

Love him or hate him, Bank of Canada Governor Stephen Poloz is on the way out. Poloz has been lauded for his near perfection in managing inflation, earning him the Central Banker of the year award in 2018.  During his tenure, the Consumer Price Index has stayed within the central...

Steve Saretsky -

A quick updated on the Vancouver housing market here. I have been tracking data on a weekly basis for the Bank of Canada. It’s unquestionably difficult to try and discern any trends in the Real Estate market on a weekly basis, but we are starting to get a sense of...

Steve Saretsky -

In his final press conference before stepping down next month, Bank of Canada governor Stephen Poloz went out with a bang. Sunny Steve painted a more rosy outlook, suggesting recent concerns are overblown. “We have to be able to manage the risks around those things, so I’m not going to...

Steve Saretsky -

As anticipated, national home sales came to a screeching halt in April. Home sales across Canada plunged both 57% on a year-over-year and a month-over-month basis. In other words, either way you want to slice it, it was the slowest April on record, dating back to 1984 when our population...

Steve Saretsky -

About 12% of all mortgages are now in deferral per Evan Siddall of CMHC. This includes both insured and uninsured mortgages, and that number could balloon to 20% by September, noted Siddall in a speech to members of the finance committee. Furthermore, its expected household debt to GDP ratios will...

Steve Saretsky -

We received a rather horrifying glimpse behind the curtain this past week, as the number of unemployed Canadians reached levels not seen since 1982. Two million jobs evaporated in April, pushing the official unemployment rate to about 13%, nearly triple what it was a few months ago. Even more heartbreaking, these...

Steve Saretsky -

News on the Coronavirus front has been getting better, and there appears to be some light at the end of the tunnel. As we brace for a possible re-opening in the next few weeks, there is a lot of talk within the real estate industry about the direction of the...

Steve Saretsky -

I wanted to provide a quick update here on the housing market. I have been tracking activity on a weekly basis and working with some policy makers to keep them up to date. Obviously everyone is trying to get a handle on what the future will look like. Right now...

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The Saretsky Report. December 2022