As per Stats Canada, activity at the offices of real estate agents and brokers dropped 15.0% in April, the largest contraction since April 2020. That was in April, so you can only imagine how the data will look in the coming months. Recent sales figures in Canada’s two largest major metros suggest this bear market is just getting started. Greater Toronto Area home sales just recorded a 20 year low in home sales in June, the second consecutive month now. The decline in sales activity is rather widespread. Here’s how it looks from a year-over-year perspective in June: York -52% Peel -52% Toronto -43% Durham -34% Prices in the suburbs are off in some cases by 15-20% from peak valuations in February. It’s been a sharp move alongside the quickest pace of increase in bond yields in recent history. While things are certainly less dire here in Vancouver, the market has entered a rather significant cooling. Greater Vancouver home sales were off 34% from last June, the fourth slowest June over the past twenty years. In the Fraser Valley it was the slowest June in over twenty years, pretty remarkable when you consider how much the valley has grown from

Another month, another record inflation print here in the Great White North. Headline inflation in Canada ticked up to 7.7% year-over-year in May, a 39 year high. Shelter, which is the largest component of the CPI basket also moved higher, up 7.4% from last year. Of course if you’re relocating in the rental market or purchasing a home for the first time then shelter inflation is substantially worse than official headlines. According to Zumper, one of the largest rental websites across North America, annual rent growth is surging across the country. Here are the top growers across across major metros for one bedroom units: 1. Calgary +15.2% 2. Victoria +15.0% 3. Vancouver +14.9% 4. Halifax +12.8% 5. Toronto +11.1% For all the talk about housing bear markets, these aren’t the worst of times for landlords who hold cash flowing rental properties. Hard assets historically perform well during inflationary periods, assuming long term mortgage debt is secured at fixed rates and they can pass on costs in the form of increasing rents. Where we go from here is anyone’s guess but things are getting messy. The response from policy makers continues to be an unmitigated disaster. First off, the Bank of Canada

Over the past several weeks regular readers of this newsletter have heard me rant about the impending slowdown in the development space. A combo of rising financing costs and still elevated construction costs makes for a rather terrible risk/reward ratio for home builders. In fact, it makes some projects economically unfeasible. Mainstream media is now catching on. From the Globe & Mail this week, Toronto housing developers could cancel the construction of up to 5,000 condo units as the costs of borrowing and building soar, according to an analysis by leading condo research group Urbanation Inc. Construction costs have climbed across the country. Putting up a high-rise in Toronto is now 21 per cent more expensive than it was during the same quarter of last year, according to Statistics Canada’s building construction price index. And with the Bank of Canada’s benchmark interest rate having risen 125 basis points in the past four months, construction loans are also becoming more expensive. According to Urbanation’s research, about 5,000 preconstruction units were sold last year for less than $1,000 per square foot, which would make them economically unfeasible to build under current financial conditions. “Many of those could cancel,” said Urbanation’s president, Shaun Hildebrand.

Another week, another bump higher in borrowing costs. The Canada 5 year bond yield ripped again, climbing above 3.3%, the highest reading since March 2008. Last time rates were this high bad things happened. As has been the theme of this newsletter for the past month or so, I continue to believe this is a terrible set-up for housing. Highly levered housing markets such as Vancouver & Toronto are not designed for a doubling of mortgage rates in a short span of four months. Rest assured, Bank of Canada Governor Tiff Macklem sure doesn’t feel that way, “The economy can handle, indeed needs – higher interest rates. Moderation in housing would be healthy.” This was the message from the governor in a press conference last week. Remember, housing volume has been chopped in half across quite a few markets, not exactly a moderation. Payment shocks are going to hit Canadians hard this year, not only at the pump and the grocery store, but on their rate renewals. The average Canadian renewing their mortgage this year will see about a 200bps increase in their mortgage rate. I can assure you, most homeowners are not actively watching the rates market, nor do

The Bank of Canada raised interest rates another 50bps this past week, signalling more pain to come. The overnight rate sits at 150bps, just shy of where the Bank of Canada got stopped out in 2019. Markets are still pricing in another 150bps of additional tightening this year, which suggests the overnight rate will sit at 3% by year end, which remains overly optimistic in my view given the debt loads not just in Canada, but around the world. Global debt to GDP sits at 365%. For further context, there’s about $30 Trillion of debt in the US alone, so a 1% increase in interest rates adds about $30B of extra interest costs, about half the annual defence budget. Suffice to say, policy makers have some difficult decisions ahead. For now the domestic housing market is adjusting rather quickly. In May, Greater Toronto home sales plunged 39% year-over-year, 31% in Greater Vancouver, and a whopping 54% in the suburbs of Vancouver (Fraser Valley). This shouldn’t be surprising given the abrupt change in financing costs over the past 3-4 months. Home buyers are waiting for prices to adjust lower to at least partially offset rising borrowing costs. Let’s run some simple

More monetary tightening is heading our way this week with the Bank of Canada fully expected to hike interest rates another 50bps on Wednesday. Assuming they do indeed hike rates by 50bps on Wednesday, Markets are still pricing in another 125bps of tightening by the end of the year. Of course, much of this depends on the direction of housing. As my friend Ben Rabidoux notes, over the past 5 years, residential housing and consumption accounts for over 80% of Real GDP growth in Canada. In other words, housing and the knock-on effects of this sector ultimately drive growth and a good chunk of inflation. Policy makers are aware of this, and it’s why they are intentionally targeting a reverse wealth-effect. They want to make you less wealthy so you spend less and drive inflation lower. This is not a conspiracy theory, central bankers are openly discussing it in the media. So, let’s turn our attention to housing. I remain of the view that housing is weaker than policy makers are likely aware of. Greater Vancouver home sales are on pace to finish nearly 20% below their long term historical average for the month of May. We are only three

It was another volatile week for financial markets. Nearly $11 trillion was erased from global equity values. If you start adding the bond and crypto markets we have $35 trillion in wealth that has evaporated. I’m often asked where is all the money coming from? How are people coming up with the down payments for $2M homes in Vancouver? I can assure you they are not working a 9-5 job and saving for twenty years, they are often cashing in gains from other financial assets. In other words, the correlation between falling stock prices and housing demand is not zero. What’s more concerning is this is all par for the course, according to the worlds most influential central bank. The Fed is targeting a reverse wealth-effect, explicitly trying to drive down asset prices in order to slow inflation. You see, the Fed can’t pump more oil, harvest more wheat, or fix supply chains, but they can influence financial conditions by raising rates, lowering asset prices and ensuring people have less money to spend. Remember, last month Bill Dudley, the former president of the Federal Reserve Bank of New York, said if financial conditions don’t tighten on their own, “the Fed

We need higher rates to moderate demand, including demand in the housing market. Housing price growth is unsustainably strong in Canada. That was the message from senior deputy governor of the Bank of Canada, Carolyn Rogers this past week. Yes, the central banks continues to talk up further rate hikes, with the goal of slowing housing in the process. As we’ve been talking about in this newsletter for several weeks now, mission accomplished. Housing activity is slowing at a rapid pace, with further data from the always insightful Ron Butler of Butler Mortgages, confirming what we already know. The 3 Mortgage Insurers in Canada: CMHC, Sagen and Canada Guaranty are down nearly 40% on unit application volume for the month of April. This shouldn’t be surprising considering the lowest 5 year fixed nationally-available uninsured mortgage is now north of 4% for the first time since 2010. Demand destruction is well underway, and house prices are already dropping in parts of the market, mostly in frothy suburban neighbourhoods. A few things worth keeping an eye on moving forward. Many borrowers are about to see their mortgage rates double this year. You see, alternative lenders like Home Capital and Equitable Group issue the

No regrets. That was the message from Bank of Canada governor Tiff Macklem when asked about his broken promise on holding rates at zero until the end of 2023. If you recall, in July 2020 Macklem gave the green light for Canadians to speculate on housing, announcing “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.” Oops. I’ll never forget when I heard these comments, it was the most obvious signal that housing was about to rip, and it did. National house price growth ripped as high as 26% on an annual basis, surpassing all previous inflationary housing booms. Throughout the entire bull market Macklem and Co determined it was simply a bit of pent-up demand that would ease. Mortgage credit growth continued to run, hitting 10 year highs, and M2 money supply growth surged by over 20%. Somehow, despite the over 300 economic research staff at the Bank of Canada they all missed the housing and inflation boom. Now come the repercussions, rates must go up in order to kill

While this is probably getting tiresome at this point, inflation came in hot once again in March, hitting a 30 year high. Consumer prices are up 6.7% from last year, and are likely to hit 8% in April based on Stats Canada finally adding used car prices to the CPI basket. This is ramping up rate hike expectations, with traders placing a two-thirds chance of a 75bps rate hike at the banks next meeting in June. Suffice to say this would be a disaster for housing which is already slowing precipitously. Again, just to reiterate many of these rate hike forecasts do not include house price declines. Raising the overnight rate to 3% will result in house price declines, it’s just a matter of how much. In other words, if you want to make money you should probably fade CMHC’s latest prediction, this time calling for a 10% increase in home prices this year. You can run models all day, but at the end of the day housing markets run off sentiment and liquidity, and both have turned south. Of course this is not just a Canadian problem. Mortgage rates in the US are the highest they’ve been since 2010, resulting

For the first time in over 20 years, the Bank of Canada raised rates by over 50bps at their most recent meeting. Everyone is panicking, inflation is here and the Bank of Canada is acting tough, they’re no longer going to support the housing market, so naturally a housing crash is just around the corner, right? Keep in mind, the big brains at the Bank of Canada were dead wrong on inflation being transitory over a year ago. They were also completely wrong on the housing boom just being a short burst of “pent-up demand”. Now they are telling you they are going to fight inflation, that the economy can handle higher interest rates and housing activity will simply moderate, no drop in home prices. Really? Have we all forgotten that Canada’s total non-financial debt to GDP is north of 350%? In other words, you can’t fight inflation without trigger the debt bomb. At some point they’ll have to choose between inflation and financial stability. In simpler terms, it sounds like the Bank of Canada is determined to keep raising interest rates until something breaks in financial markets. My opinion is that something will break much sooner than they are

The Federal Government unveiled an updated budget this past week, and it included a wide range of housing policies. While many of these were good headline grabbers, some of them will never see the light of day, and others lack any real substance. Let’s dissect some of them further. Foreign Buyer Ban The media took this one and ran with it. A two year ban on foreign buyers across the nation. It made for great headlines until you read the fine print. Unlike most of the Governments housing policies, this one has no official start date. In fact, here’s the exact wording they used in the budget, “To make sure that housing is owned by Canadians instead of foreign investors, Budget 2022 announces the government’s intention to propose restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non- recreational, residential property in Canada for a period of two years.” They intend to propose. In other words, we might never see this get passed through parliament. Even if it is passed, it is loaded with loopholes. It exempts International students on the path to permanent residency and individuals on work permits who