Bank of Canada: Have we entered a new era of structurally higher interest rates?

[Castanza]

On 6/9/2023 at 4:24 PM, ICUMD said:

Decriminalization of drugs is a terrible idea. Humans and esp kids have a curious nature and a significant subset of these drug experimentors will become full blown addicts. I've seen this first hand. 

 

Legalizing highly addictive substances only increases proliferation and uptake.

 

Treatment centers while fine in an of themselves, do not target prevention which is the mainstay of any public health initiative.  

 

Rather, there needs to be harsh penalties for the dealers ensnaring kids and young adult. Supply chains of illicit drugs need to be broken.  

 

A terrible thing to see promising lives lost in this way.

 

 

I go back and forth on this issue but I tend to agree with you more now because the prevalence of mental health issues in the US and Western societies is at ridiculous highs. Prescription drug abuse is already bad enough as it is. Making street drugs legal (besides weed) is a recipe for disaster. Fentanyl is killing 100k people a year in the US and it's getting worse. Make heroin or cocaine legal and you're just fueling the mental health crisis even more. If society was more sane I would say sure try it. A quick trip to your grocery store will tell you all you need to know. The flip side is, "The War on Drugs" has been fruitless and costs the US billions every year; And the prison system is also a complete mess which costs billions as well. Both industries have only grown.  

[Red Lion]

Why not legalize drugs, sell them through pharmacies. Send people to rot for selling fake/adulterated drugs. This will cripple the cartels and organized crime, and put the pain and suffering on the backs of people putting up with the consequences of their own action. 
 

If someone gets addicted to coke, meth, heroin, etc. that’s on them. If they start stealing things or attacking people, send them to prison. 
 

I really hate the idea of the government taking away our personal freedoms just because some people are going to get addicted. Also I hate this woke nonsense of decriminalizing drugs and theft at the same time ala California or Oregon and then letting homeless drug addict thieves ruin cities.

 

Anyone remember the last time we passed sweeping restrictions of freedom based on the advice of (some of the) doctors? Maybe we should outlaw French fries while we are at it, and then build a trillion dollar black market fried food business? 

 

Edited June 12, 2023 by RedLion

[Spooky]

Not sure if this is the right thread but it is related to Canadian real estate / interest rates.

 

https://www.wsj.com/articles/whats-killing-productivity-some-think-its-the-banks-9d1d0c50

 

Came across this article in the WSJ today about the UK's productivity issue and the fact that the bank's there are not lending to businesses but rather most of their loans are going to finance mortgages which is possibly damaging / limiting their economy. A similar phenomenon is happening in Canada with 33 per cent (Bank of Montreal) to 53 per cent (CIBC) of the bank's loans tied up in mortgages and only about 13% of the bank's loan book going to business loans (https://www.theglobeandmail.com/opinion/editorials/article-the-big-banks-dependence-on-housing-undermines-canadas-prosperity/). Small businesses in the UK are relying on start-up loan providers with much higher interest rates.

 

The article also referenced the McKinsey report below which shows that two-thirds of the western world's net wealth is in real estate and only a fifth is in productivity-boosting assets such as factories, equipment and infrastructure.

 

https://www.mckinsey.com/~/media/mckinsey/industries/financial services/our insights/the rise and rise of the global balance sheet how productively are we using our wealth/mgi-the-rise-and-rise-of-the-global-balance-sheet-full-report-vf.pdf

 

Does anyone else see this as a big problem for the future in Canada (and some other jurisdictions)? It seems to me that banks are loaning more / borrowers are borrowing more to finance home purchases, driving up the cost of homes but not having any productive impact on the economy and diverting capital which could go to more productive uses for society.

 

 

[bizaro86]

1 hour ago, Spooky said:

Not sure if this is the right thread but it is related to Canadian real estate / interest rates.

 

https://www.wsj.com/articles/whats-killing-productivity-some-think-its-the-banks-9d1d0c50

 

Came across this article in the WSJ today about the UK's productivity issue and the fact that the bank's there are not lending to businesses but rather most of their loans are going to finance mortgages which is possibly damaging / limiting their economy. A similar phenomenon is happening in Canada with 33 per cent (Bank of Montreal) to 53 per cent (CIBC) of the bank's loans tied up in mortgages and only about 13% of the bank's loan book going to business loans (https://www.theglobeandmail.com/opinion/editorials/article-the-big-banks-dependence-on-housing-undermines-canadas-prosperity/). Small businesses in the UK are relying on start-up loan providers with much higher interest rates.

 

The article also referenced the McKinsey report below which shows that two-thirds of the western world's net wealth is in real estate and only a fifth is in productivity-boosting assets such as factories, equipment and infrastructure.

 

https://www.mckinsey.com/~/media/mckinsey/industries/financial services/our insights/the rise and rise of the global balance sheet how productively are we using our wealth/mgi-the-rise-and-rise-of-the-global-balance-sheet-full-report-vf.pdf

 

Does anyone else see this as a big problem for the future in Canada (and some other jurisdictions)? It seems to me that banks are loaning more / borrowers are borrowing more to finance home purchases, driving up the cost of homes but not having any productive impact on the economy and diverting capital which could go to more productive uses for society.

 

 

 

I think many/most small businesses are started with mortgage funds. I launched my business with funds from HELOCs on rental properties.

[Cigarbutt]

On 6/9/2023 at 10:14 PM, Spekulatius said:

It all depend on what the US Fed is doing. All the other central banks are more or less just following the Fed, they just have to. If they don’t and the Fed raises rates, their currency will get trashed.

It’s especially true for Canada, because their economy is so closely tied to the US economy.

Longerish term, interest rates are tied to inflation rates and inflation rates...

So yes, so much for 'independence' and domestic priorities when the recent inflation surge appears to have key underlying ingredients that are shared by the US and Canada as well as other more 'developed' countries.

An interesting aspect is that the recently added ingredients are coincident and even backward looking and work with a (few months) lag.

[UK]

https://www.bloomberg.com/news/features/2023-06-18/canada-s-immigration-policies-may-boost-its-labor-market-economy?srnd=premium-europe#xj4y7vzkg

[UK]

https://www.wsj.com/articles/canada-tests-the-limits-of-its-liberal-immigration-strategy-bc61e0de?mod=lead_feature_below_a_pos1

 

The country of 40 million people last year welcomed more than one million permanent and temporary immigrants, Statistics Canada said. That influx generated a population growth of 2.7%; the increase of 1.05 million people was nearly equivalent to last year’s increase in the U.S., a country with more than eight times Canada’s population. In the next two years, Canadian officials say they will boost the number of permanent newcomers by almost a third, with most being skilled migrants such as carpenters, computer scientists and healthcare workers who qualify under a merit-based points system.

[mcliu]

Canada's stuck in a tough place. No growth, high debt, high inflation.

Cut rates = weak currency, more imported inflation. Raise rates = credit crisis, negative growth.

Only positive is the strong oil prices and production but that's also being dismantled by poor policy.

 

https://www.blogto.com/city/2023/08/hundreds-lining-up-apply-ontario-mcdonalds-job-market/

 

Decade of stagnant GDP per capita:

 

Record household debt to gdp and debt to income:

[UK]

https://www.bloomberg.com/news/articles/2023-09-19/canada-rental-market-squeezed-as-landlords-face-brunt-of-high-interest-rates?srnd=premium-europe

[Viking]

1 hour ago, UK said:

https://www.bloomberg.com/news/articles/2023-09-19/canada-rental-market-squeezed-as-landlords-face-brunt-of-high-interest-rates?srnd=premium-europe

Below are a few quotes from the article. The tide is going out in Canadian real estate and we are beginning to understand who has been swimming naked. The additional problem for real estate investors in Vancouver is rent increases are dictated by the provincial government (2% in 2023, 1.5% in 2022). Older housing stock in Toronto is rent controlled (i think). If rates stay high (which is what it looks like) a lot of ‘investors’ in Vancouver/Toronto are going to learn that leverage can be a bitch:

1.) much higher interest rates - variable rate mortgage

2.) falling housing prices

3.) limited ability to increase rents
 

“The problem facing Canada’s real estate investors, whether they’re buying a new property or they have a floating-rate mortgage on one they already own, is that the math simply doesn’t work at today’s interest rates. Modeling by the Bank of Montreal shows that in Toronto, anyone using a mortgage with a standard 20% down payment to buy a rental property at today’s prices, charging today’s rents, would be signing up to lose about C$1,000 (roughly $738) each month.

 

These cashflow calculations have been negative since 2016, but investors were generally willing to overlook that because part of those payments were paying down the mortgage’s principal, thus building equity in the investment. But in the last year, the cashflows have gone so deeply negative, it even offsets those equity gains, the BMO modeling shows.“

 

“Rental amounts aren’t going up fast enough to cover for the huge increase in interest rates,” he said. “Effectively what we do is we flush out all the people who are holding their breath. That’s what we’re starting to see here.”

[UK]

25 minutes ago, Viking said:

Below are a few quotes from the article. The tide is going out in Canadian real estate and we are beginning to understand who has been swimming naked. The additional problem for real estate investors in Vancouver is rent increases are dictated by the provincial government (2% in 2023, 1.5% in 2022). Older housing stock in Toronto is rent controlled (i think). If rates stay high (which is what it looks like) a lot of ‘investors’ in Vancouver/Toronto are going to learn that leverage can be a bitch:

1.) much higher interest rates - variable rate mortgage

2.) falling housing prices

3.) limited ability to increase rents
 

“The problem facing Canada’s real estate investors, whether they’re buying a new property or they have a floating-rate mortgage on one they already own, is that the math simply doesn’t work at today’s interest rates. Modeling by the Bank of Montreal shows that in Toronto, anyone using a mortgage with a standard 20% down payment to buy a rental property at today’s prices, charging today’s rents, would be signing up to lose about C$1,000 (roughly $738) each month.

 

These cashflow calculations have been negative since 2016, but investors were generally willing to overlook that because part of those payments were paying down the mortgage’s principal, thus building equity in the investment. But in the last year, the cashflows have gone so deeply negative, it even offsets those equity gains, the BMO modeling shows.“

 

“Rental amounts aren’t going up fast enough to cover for the huge increase in interest rates,” he said. “Effectively what we do is we flush out all the people who are holding their breath. That’s what we’re starting to see here.”

 

However, what is also interesting: 

 

And while such distress does seem to be fueling an increase in properties available for sale, there’s still such a shortage of inventory that prices haven’t substantially fallen. It’s all threatening to further aggravate the shortage of all housing types in Canada, hurting homebuyers and renters alike. “Everything is in a really bad place right now,” said Danielle Levy, a real estate broker in Toronto who works with both buyers and renters. “People aren’t able to afford the rent. People are not able to afford paying their mortgage. People are not able to fulfill their goal to purchase a home to start a new life with their families. We need a lot more supply in the market.”

 

It seems this is also the case in other previously hot markets, like Australia, Great Britain etc. This article points to some interesting reasons: 

 

https://www.economist.com/international/2023/09/06/the-growing-global-movement-to-restrain-house-prices

 

Like:

 

In many English-speaking countries, inspired by Victorian worries about “slums”, planning laws tended to prioritise detached houses. For urban planners, such as Ebenezer Howard, density was seen as akin to crowding. In packed industrial hotspots, “downzoning” and slum clearance were used to flatten cities and spread them out by force. The writer George Orwell was sceptical of the proceedings: “If people are going to live in large towns at all they must learn to live on top of one another,” he declared. But he reckoned that many workers in Britain did not “take kindly to flats”. Today far fewer citizens of English-speaking countries live in flats than elsewhere. In England 80% of people now dwell in houses, and just 6% in flats in buildings taller than three storeys. In France 44% of people live in apartments, as opposed to houses. In cities including Dublin, Los Angeles and Sydney, sprawl is running out of road. At the densities allowed by law, almost all of the land within a reasonable commute of city centres has already been “built out”. Instead, new subdivisions are built in separate towns, perhaps 50 or 60 miles away from the core, with residents typically facing punishing commutes by car to work. (In Britain these workers typically leap over the “green belts” around cities within which construction is mostly illegal.)

 

Anyway, maybe except for the Sweden and some regional markets, so far housing prices seems to be holding up or even begin to rise again in some places. 

 

 

Edited September 19, 2023 by UK

[Viking]

56 minutes ago, UK said:

 

However, what is also interesting: 

 

And while such distress does seem to be fueling an increase in properties available for sale, there’s still such a shortage of inventory that prices haven’t substantially fallen. It’s all threatening to further aggravate the shortage of all housing types in Canada, hurting homebuyers and renters alike. “Everything is in a really bad place right now,” said Danielle Levy, a real estate broker in Toronto who works with both buyers and renters. “People aren’t able to afford the rent. People are not able to afford paying their mortgage. People are not able to fulfill their goal to purchase a home to start a new life with their families. We need a lot more supply in the market.”

 

It seems this is also the case in other previously hot markets, like Australia, Great Britain etc. This article points to some interesting reasons: 

 

https://www.economist.com/international/2023/09/06/the-growing-global-movement-to-restrain-house-prices

 

Like:

 

In many English-speaking countries, inspired by Victorian worries about “slums”, planning laws tended to prioritise detached houses. For urban planners, such as Ebenezer Howard, density was seen as akin to crowding. In packed industrial hotspots, “downzoning” and slum clearance were used to flatten cities and spread them out by force. The writer George Orwell was sceptical of the proceedings: “If people are going to live in large towns at all they must learn to live on top of one another,” he declared. But he reckoned that many workers in Britain did not “take kindly to flats”. Today far fewer citizens of English-speaking countries live in flats than elsewhere. In England 80% of people now dwell in houses, and just 6% in flats in buildings taller than three storeys. In France 44% of people live in apartments, as opposed to houses. In cities including Dublin, Los Angeles and Sydney, sprawl is running out of road. At the densities allowed by law, almost all of the land within a reasonable commute of city centres has already been “built out”. Instead, new subdivisions are built in separate towns, perhaps 50 or 60 miles away from the core, with residents typically facing punishing commutes by car to work. (In Britain these workers typically leap over the “green belts” around cities within which construction is mostly illegal.)

 

Anyway, maybe except for the Sweden and some regional markets, so far housing prices seems to be holding up or even begin to rise again in some places. 

When it comes to housing, Canada is facing the perfect storm.
1.) First we blew a housing bubble that is probably bigger than the the US housing bubble that popped in 2008. So we have crazy high prices.

2.) All mortgage rates here are variable, with crazy low teaser rates. Those teaser rates are now resetting, with most resetting in 2024 and 2025. The parallels with US housing in 2006-2007 are frightening.

3.) Bubble high real estate prices + 6% mortgage rates = $3,000/month to rent a one bedroom. That is the math for a new investor. Rents on new rental units coming to market have doubled in the past 2 years. 

3.) Rents in Vancouver are controlled by the government. Same for older housing stock in Toronto. So in the same building two of the exact same units can rent for $1,500/month and $3,000/month. So no renters can afford to move today - your rent is going to double if you do. The rental market is effectively frozen. 
4.) Supply always has been tight and vacancy rates in Vancouver and Toronto have always been extremely low (2% or less). 
5.) Demand

- the number of international students has increased in recent years from a run rate of 200,000 per year to about 800,000 today. The net add has been 600,000. Why the increase? International students pay up to 6x the amount for tuition compared to a Canadian student. International students are driving the budgets of universities now. The provincial/federal governments usually fund education but international students have now become the golden goose for most institutions. Provinces and feds love it because they can spend $ on other priorities. Of course, no one asked if we have the housing to support an increase of 600,000 people. 
- the Federal government also decided recently to boost immigration to 500,000 per year. GDP/capita has been falling for years in Canada. Fix? More people. Total GDP grows (easy way to paper over the problems under the surface).
- temporary foreign workers. We also have a shortage of workers so we have also been bringing in 200,00 or so foreign workers each year. 
When you add the three together… Stats Canada just admitted they have undercounted the number of new people coming to Canada by 1 million people. 
6.) Supply. The Bank of Canada is trying to slow the economy to get inflation under control. How? Higher interest rates. This lowers activity in interest rate sensitive parts of the economy, primarily housing. And it is working. New building permits are down a lot. New construction is slowing. Fewer units will be coming to market looking out a couple of years.
 

So we have a really messed up situation. Market was already super tight. Supply is constrained. Demand is through the roof and growing - the governments are not changing any of the rules (students, immigration, foreign workers) - at least as of today.
 

Housing looks like it is going to be the dominant issue in this country moving forward.

Edited September 19, 2023 by Viking

[UK]

13 minutes ago, Viking said:

When it comes to housing, Canada is facing the perfect storm.
1.) First we blew a housing bubble that is probably bigger than the the US housing bubble that popped in 2008. So we have crazy high prices.

2.) All mortgage rates here are variable, with crazy low teaser rates. Those teaser rates are now resetting, with most resetting in 2024 and 2025. The parallels with US housing in 2006-2007 are frightening.

3.) Bubble high real estate prices + 6% mortgage rates = $3,000/month to rent a one bedroom. That is the math for a new investor. Rents on new rental units coming to market have doubled in the past 2 years. 

3.) Rents in Vancouver are controlled by the government. Same for older housing stock in Toronto. So in the same building two of the exact same units can rent for $1,500/month and $3,000/month. So no renters can afford to move today - your rent is going to double if you do. The rental market is effectively frozen. 
4.) Supply always has been tight and vacancy rates in Vancouver and Toronto have always been extremely low (2% or less). 
5.) Demand

- the number of international students has increased in recent years from a run rate of 200,000 per year to about 800,000 today. The net add has been 600,000. Why the increase? International students pay up to 6x the amount for tuition compared to a Canadian student. International students are driving the budgets of universities now. The provincial/federal governments usually fund education but international students have now become the golden goose for most institutions. Provinces and feds love it because they can spend $ on other priorities. Of course, no one asked if we have the housing to support an increase of 600,000 people. 
- the Federal government also decided recently to boost immigration to 500,000 per year. GDP/capita has been falling for years in Canada. Fix? More people. Total GDP grows (easy way to paper over the problems under the surface).
- temporary foreign workers. We also have a shortage of workers so we have also been bringing in 200,00 or so foreign workers each year. 
When you add the three together… Stats Canada just admitted they have undercounted the number of new people coming to Canada by 1 million people. 
6.) Supply. The Bank of Canada is trying to slow the economy to get inflation under control. How? Higher interest rates. This lowers activity in interest rate sensitive parts of the economy, primarily housing. And it is working. New building permits are down a lot. New construction is slowing. Fewer units will be coming to market looking out a couple of years.
 

So we have a really messed up situation. Market was already super tight. Supply is constrained. Demand is through the roof and growing - the governments are not changing any of the rules (students, immigration, foreign workers) - at least as of today.
 

Housing looks like it is going to be the dominant issue in this country moving forward.

 

I understand. But it still looks more like a growing pains, than some insurmountable problems. Mostly everything is fixable. People are still flocking to North America like crazy, not without a reason. Were else on earth is a better place?

[John Hjorth]

Who do you think this real estate situation in Canada combined with the interest rate increases evetually is going be a pitty for, @Viking [and others, too] ?

Edited September 21, 2023 by John Hjorth

[SharperDingaan]

Couple of points:

 

Canadian interest rates are simply returning to long-term historic norms; we're just working through the hangover of extreme low interest rates from the Covid era. The price bubble arising out of low interest rates/very tight supply is slowly being deflated as fixed rate (blended payment, up to 5 yr terms) mortgages reset upon renewal, and supply rises as investors are forced to sell. Very little systemic risk (CMHC insured mortgage, bank capital buffers at highs/going higher, principal pay downs, term extension, etc.), but quite a bit of household risk (the more so the less financially literate you are, & most people).

 

Investors built/bought office/warehouse/condos/houses, & have mostly sat on them; minimising accumulating unrealised loss by keeping them off the market, and prices high. Per the media reporting, it would seem that many are about to fold; speculators/investors fleeing, the new supply flooding the market/forcing down price, & ordinary people finally getting a chance to buy at more historic valuations. The inflation reducing, practical, & shorter term solution to the housing market.

 

However, a lot of rich/entitled people are going to get burned, & the knock-on effects from related bankruptcies (over-borrowed against high RE valuations) are difficult to proactively quantify. Drowning people scream, and the media will be full of negative 'human interest' RE investment stories, feeding into the selling loop. The 'good news' affordability stories largely ignored, as the sources don't contribute to political campaigns.  

 

Not a bad thing, and long overdue. 

Moral hazard exists, it doesn't care how 'special' you are, & it's a bitch. Get used to it.

 

SD

 

 

Edited September 20, 2023 by SharperDingaan

[SharperDingaan]

Some add on's:

 

A great many investment properties sit unoccupied/partially vacant. A first great wave of new housing will be their return to market, as/when landlords finally have to dump &/or re-purpose vacant office space; & everyone is screaming as to how 'awful' Canadian real estate investment is. Multiple towers worth of condominium units all rushing the exit at once, & new condo's getting cancelled (freeing up construction workers).

 

A second wave of new housing (largely housing new Canadians/first time buyers) being the result of policy action. Probably a version of the 1970's MURB for qualified first time buyers, with a low DP and a non-transferable 25 year term fixed rate mortgage at 3-5%, backstopped by the BoC; sell the place, & the low rate mortgage is immediately repaid. Zoning amended to accommodate brown-field tear-downs & replacement with similarly zoned but larger buildings.  Whichever political party implementing it, probably remaining in power for a consecutive 3-4 terms.

 

Lot of disruption, but with it - opportunity.

 

SD

 

 

 

 

 

Edited September 20, 2023 by SharperDingaan

[Viking]

12 hours ago, John Hjorth said:

Who do you think this real estate situation in Canada combined with the interest rate increases is going eventually going be a pitty for, @Viking [and others, too] ?

@John Hjorth despite my post above, i am optomistic. The fact we have a crisis (in Vancouver/Toronto) the politicians now have the cover they need to do what needs to be done. Vancouver had lots of land… we just need to densify the downtown areas (imagine if Manhattan or downtown Copenhagen only allowed single family homes to be built with big yards?). 

 

And we are beginning to see real change and my guess is we are just getting started:

- zoning rules have changed in Vancouver from a single family bias to a multi family bias.

- Federal and provincial governments are implementing new policies to try and stimulate supply of multifamily buildings

 

@SharperDingaan i never thought about the supply of workers shifting from building condos to building affordable multifamily units (being encouraged by governments). perhaps the pivot can happen a little more quickly than i initially thought. 

Address is also from the demand side: This is the quicker way to address the problem. My guess is we also will get a slowdown in the number of foreign students/immigration/foreign workers. As better information/stats becomes available the federal/provincial governments are going to be forced to do something - or they will likely get hammered in the next election.

 

Who loses? My guess is the people who have too much debt. So anyone who bought in the past 5 years and are carrying a big mortgage. Maybe 10% of homeowners today, so in the big scheme of things not a big number.

 

The fundamental issue is prices are simply too high. IF interest rates stay elevated, my guess is we will see price slowly come down (over a couple of years. Maybe 10 or 15% in nominal terms. Factor in inflation and you get a 25% correction in real terms over a 3 year period. Nothing catastrophic. 
 

The market will find a new equilibrium. 

Edited September 20, 2023 by Viking

[Viking]

2 hours ago, SharperDingaan said:

Some add on's:

 

A great many investment properties sit unoccupied/partially vacant. A first great wave of new housing will be their return to market, as/when landlords finally have to dump &/or re-purpose vacant office space; & everyone is screaming as to how 'awful' Canadian real estate investment is. Multiple towers worth of condominium units all rushing the exit at once, & new condo's getting cancelled (freeing up construction workers).

 

A second wave of new housing (largely housing new Canadians/first time buyers) being the result of policy action. Probably a version of the 1970's MURB for qualified first time buyers, with a low DP and a non-transferable 25 year term fixed rate mortgage at 3-5%, backstopped by the BoC; sell the place, & the low rate mortgage is immediately repaid. Zoning amended to accommodate brown-field tear-downs & replacement with similarly zoned but larger buildings.  Whichever political party implementing it, probably remaining in power for a consecutive 3-4 terms.

 

Lot of disruption, but with it - opportunity.

 

SD

@SharperDingaan you highlight the thing i have never understood. How can Canada have a housing crisis (driven partly by lack of supply) when it was in a multiyear construction boom of epic proportions? 
 

I hope that you are right and there are a lot of units sitting empty that will now be put now to productive use. 

[no_free_lunch]

This is a great discussion and unfortunately politically charged when it shouldn't be so much.  I think all parties want enough housing.  The consensus I have, is that there is a huge shortage of supply.  I tend to read the same set of sources, generally right leaning, so it's good to see others perspective.

 

Just one link on the structural shortage of homes we are looking at.  Not sure that there are enough vacant homes out there to address this.

 

Canada Mortgage and Housing Corporation estimated in June that an additional 3.5 million housing units needed to be built by 2030 to achieve affordable housing for everyone living in Canada. That’s on top of the 2.3 million units it expected to be built by that time at current rates of construction.

..

“Canada’s approach to housing supply needs to be rethought and done differently,” CMHC deputy chief economist Aled ab Iorwerth said in the report. “There must be a drastic transformation of the housing sector, including government policies and processes, and an ‘all-hands-on-deck’ approach to increasing the supply of housing to meet demand.”

..

CIBC deputy chief economist Benjamin Tal suggests in a recent report that Canada’s actual increase in housing demand is far higher than official estimates.

 

Ottawa is aiming to increase the number of new immigrants by 75 per cent over pre-pandemic levels by 2025. But saying 465,000 new immigrants in 2023 does not mean net population growth due to immigration and thus demand for housing will rise by 465,000, he said.

 

Tal argues that it’s not the number of new immigrants that should be used to calculate housing demand, but the number of new people coming into the country from abroad. And these numbers, he says, have been vastly underestimated

..

Altogether, permanent and non-permanent residents arriving from outside the country in 2022 approached 955,000 which represents “an unprecedented swing in housing demand in a single year that is currently not fully reflected in official figures,” said Tal.

..

“It’s not a stretch to suggest that the number of new international arrivals in 2023 might reach one million,” said Tal.

 

“This kind of inflow suggests that existing policy tools could easily fall short of addressing the current and further increase in housing demand.”

 

https://financialpost.com/executive/executive-summary/housing-demand-stronger-than-expected

[John Hjorth]

Thank you all for your posts containing your personal considerations, It's a fascinating discussion going on in this topic by now. Please continue - I hope you will.

 

Where do you consider the big Canadian banks to be situated in this actual situation for Canada?

[no_free_lunch]

Banking is too complex and risky for me.  There are a lot of variables, interest rates, government involvement, legal issues.  I only like US banks.  I think the construction industry is the way to play.   I have no investments in that area but I am looking.

[SharperDingaan]

A lot of the construction boom condos were bought as assignment flips, with Airbnb rental as the last resort. Mom/dad bought a condo for the kids to use while at school; post graduation the kids used the condo as equity to support condo assignment flips/purchases ... & now there's not enough equity/rental revenue to cover the higher mortgage interest & operating costs. As long as mom/dad continue to cover the monthly shortfall, the empire can be slowly sold off & unwound ... but comes the day they collectively apply the brake, the empire implodes on the recourse mortgages.

 

Typical example: 5% (30K) deposit put down on a 600K condo that was to be built precovid. Post covid the expected price has escalated to 1M inclusive of interest costs & upgrades needed to sell the condo in this new world. Buyer either puts up an additional 20K (to total 50K) by date X, or both loses the assignment deposit & becomes liable for any losses the developer incurs on disposal of the unit. Without the money, & desperate to exit; the seller accepts 5K in an assignment sale. All else equal if the condo is built, the developer marks the unit down to 850K to shift the inventory & finally exit; the buyer gets the future upgraded unit for 25K (5K+20K additional) plus a 800K mortgage; if the developer bankrupts the buyer is out 25K. The buyer essentially bought a long dated call option with a strike at 850K, for 25K; if (when opened) the condo eventually reprices at a value of 1.1M .. & you sell, you have 250K - commission & legal costs  .

 

The existing airbnb condo sold to a family to live in, is the same as a condo built; & if an empires condos are liquidated, a lot of families benefit ... from both additional supply & lower price. Furthermore, if the empire is not amongst the first at the exit, the shortfalls from recourse mortgages are going to be a lot higher; hence the traders well-known 'your first loss, is your smallest loss'. Burning fuse.

 

Most of the condo's have high condo fees, aren't spacious, and are not a great fit for families. But if it becomes affordable, has good access to public transit, & is not a dive, it's not a bad interim step; especially for someone just on their own.

 

The big banks are well protected, but the public will probably not see it that way & sell them off aggressively. Same as in oil/gas, a miss-pricing to take advantage of.

 

SD

 

 

Edited September 21, 2023 by SharperDingaan

[Viking]

2 hours ago, John Hjorth said:

Thank you all for your posts containing your personal considerations, It's a fascinating discussion going on in this topic by now. Please continue - I hope you will.

 

Where do you consider the big Canadian banks to be situated in this actual situation for Canada?

My guess is the Canadian big banks will be fine. Unless we have a bit of a crash in the housing market (driven by economic recession - and an increase in unemployment). Not likely, from my perspective but possible. I think the big Canadian banks are cheap. They are a regulated oligopoly - they have morphed into a utility type of investment. For example, the returns for investors (as a basket) have tracked close to the dividend yield for the past 5 years. At current prices (20% off highs) probably a decent entry point - unless Canada has a hard landing like the US in 2008.

 

Part of the challenge today is the data on housing is very poor. The lending process is a mess. The pandemic turned everything on its head. The government (federal and provincial) have been asleep at the wheel in terms of spike of permanent / nonpermanent residents. Taxes (as a % of selling price) on a new build has gone from 10% eight years ago to 30% today (didn’t matter when prices were going up 8% per year. Zoning (controlled my minipitailites) is archaic and driven by NIMBY - not in my backyard. Oh, and interest rates are about 6.25% and new buyers have to have the income to qualify at and 8.25% rate (called a stress test). 
 

The average price of a detached house in greater Vancouver is $2.4 million. The average price for a condo/apartment is $800,000. The average salary in Vancouver is $69,000 (25% of this will go to income taxes). At a 8.25% qualifying mortgage rate the math doesn’t work (my attempt at humour).

Edited September 20, 2023 by Viking

[RichardGibbons]

3 hours ago, Viking said:

Taxes (as a % of selling price) on a new build has gone from 10% eight years ago to 30% today

 

Do you happen to have a source for this?  (Not because I doubt it, but rather because I'm curious about the underlying math.)

[Viking]

1 hour ago, RichardGibbons said:

 

Do you happen to have a source for this?  (Not because I doubt it, but rather because I'm curious about the underlying math.)

I heard this on a podcast a while back (not sure which one). I did a quick search online and found the following article: 

 

“For a typical wood-frame condo development in Vancouver, the fees represent 29.25 per cent of the unit’s final purchase price.”

 

- https://biv.com/article/2023/07/government-fees-inflate-risk-uncertainty-bc-builders#:~:text=Municipal fees account for the,is attributed to regional fees.

 

“Government fees imposed on a project can range from those that cover infrastructure-related needs (DCCs and development cost levies), community contributions that will offset density (CACs), a federal goods and service tax (GST), building and development permits, property transfer taxes and the speculation and vacancy tax. 

 

“ In Vancouver, there is also the additional empty homes tax and a public art fee, according to a February 2023 Urban Development Institute, Pacific Region report. 

 

“The total cost of government fees represents 32.72 per cent of rent that the end-user pays in a typical wood-frame, purpose-built rental development in Vancouver. 
 

“Municipal fees account for the majority of this total at 44.27 per cent; federal and provincial fees account for 28.39 and 24.15 per cent, respectively. The remaining 3.18 per cent is attributed to regional fees. For a typical wood-frame condo development in Vancouver, the fees represent 29.25 per cent of the unit’s final purchase price.”