Three months ago, I began a series on housing froth and stated Canada was headed for a market not seen since the fabled 2016 bubble. Since then, we have seen a rampage in the real estate market, not only in Vancouver and Canada, but across the globe.
To combat potential housing bubbles, countries around the world are placing preventative measures: France limiting mortgages to 25 years and banning leverage over a 35% debt service ratio; South Korea limiting mortgages over $1.3M USD and placing 70% capital gains tax rates on a home flip; and New Zealand limiting leverage on investors. Canadian policy makers remain purposely absent to prop up the economy on false grounds.
Today, I outline Canadian and global housing froth, and the economic variables at play.
In Greater Vancouver
Dollar volume of closed sales reaches all time highs. Nearly doubling from February, and reaching over one billion dollars higher than what was seen in 2016.
Dollar volume of closed sales reaches $6,888,000,000+
Sales to active ratio reaches an all time high of 62%, compared to 42% last month. In a typical healthy market we see 20-25%.
Sales to active ratio reaches 62%
With a lucrative seller’s market developing, new listings reach an all time high at over 8,000, 87% over March 2020, and an astonishing 64% over last month.
New listings reach 8,250+
Despite the market flooding with new listings, days on market reaches an all time record low at only eight days.
Days on market at eight days
How Does This Compare to the Rest of Canada
Canadian real estate prices rose faster than incomes, with national benchmark prices increasing $118,200 in January, while incomes grew a mere $86,970. In February there were more regional real estate boards reporting price increases in excess of 25% than there were reporting less than 25%. Note: these data do not include frothier March numbers.
Benchmark price of a typical Canadian home
Canadians are in a speculative bubble where there are only expectations for higher highs.
60% of Canadians see home prices rising over the next six months
Canadian real estate is starting to feel like the legendary tulip-mania in 1636.
At the peak of tulip mania, single tulip bulbs sold for more than 10 times the annual income of a skilled artisan.
Think Canadian real estate is bubbly? Well, the Canadian Mortgage and Housing Corporation [CMHC] stated that the national housing sector has “only moderate level of vulnerability for the second quarter in a row”. Yes, saying this while the Bank of Montreal quotes rural Chatham, Ontario seeing home prices rocketing 35% year-over-year, which is a bigger dollar rise in one year than in the 30 years from 1985 to 2015 combined.
Despite what the CMHC would like to tell us, there’s housing froth from cottage country to the big city. Your home is the bank’s collateral and they are incentivized to support valuations:
“It’s hot, and we could see signs of speculation, but we have to accept that because otherwise we could have a really, really bad recession” - Stephen S. Poloz, Governor of the Bank of Canada.
This housing froth was manufactured, and unlike Gamestop, there’s no halt for prices rallying too fast. Policy makers are relying on an artificially inflated real estate market to hold the economy together:
Residential investment beats out capital use for new business activity
Canada’s residential investment goes vertical, breaking all time highs at over 9%
Canada’s residential investment percentage of GDP comes in at 9.27% in Q4 2020, showing that Canada is now >30% more dependent on real estate than the US at the peak of their bubble prior to the Great Financial Crisis.
From coast to coast, we are seeing housing boiling to unprecedented levels. How does this compare to housing across North America? What global economic drivers are playing to fuel our local Vancouver real estate market?
Real Estate Across the Globe
Global housing prices are rising with Canada leading the pack
Housing froth is occurring across the globe as quantitative easing programs make for easy money. South of the border, US home seller gains are at all time highs where distressed sales drop to a 15-year low.
Historical home seller dollar gains reach all time highs
Distressed sales at their lowest since 2005
Credit is cheap, and Americans are taking advantage of it. In the final three months of 2020, American mortgage originations hit their highest quarterly volume ever as Americans refinanced more mortgage debt in 2020 than any other time since 2003.
The US real estate market is showing a recipe to continue ramping. Existing home sales are hitting all time highs and supply hitting all time lows for February:
Existing home sales well-exceed the peak prior to the Great Financial Crisis, and inventory at multi-decade lows
US housing supply is not being crushed in one location. It’s a nationwide epidemic driven by cheap credit:
Housing supply drops well below the average across the nation
Demand in Canada has homebuilders delivering an unprecedented 18+ homes per person the population grew by in Q4 2020. An increase from the previous record quarter of 2.26!
600%+ over previous all-time highs
The majority of homebuilders are restricting sales and raising prices several times a month due to too much demand — all while construction costs rip higher.
Low rates push lumber prices higher due to high demand and low elasticity, and building more housing with higher input costs makes expensive housing even more expensive:
Lumber futures prices rally from a $250 April 2020 low to over $1,000.
When lumber memes show up on Facebook, you know people are noticing
Similarly, US housing starts reach their highest since September 2006, prior to the Great Financial Crisis:
Housing starts have remained well below that level for over a decade
It’s clear housing is in a speculative frenzy from our temperate rainforest in Vancouver, to sunny Miami Florida. 30+ offers on a small city property just cannot continue, can it? 28,000 Canadian buyers have bought homes since the new year, and there are now 5,000 new listings per week versus 2,000 at the beginning of the year, indicative of more supply and less demand. Price acceleration should decrease as it is simply unsustainable, however absolute prices can steadily increase.
What’s behind this monumental housing push and what can we expect moving forward into the busiest time of year in real estate?
Peeking Behind the Curtain:
Across the globe, economies were put at risk with the Covid-19 outbreak and quantitative easing programs were created and/or accelerated. The European Central Bank now owns over 75% of Eurozone GDP, the US Federal Reserve with 35.3% of assets, the Bank of England 37.7%, and the Bank of Japan 129.1%. Canada is no different.
In the previous article, I detailed the quantitative easing program Canada employed at the beginning of the pandemic to hold the economy together as best as it could. The Bank of Canada [BoC] is now unwinding its crisis liquidity facilities, reducing total assets from $575B to $475B by the end of April, however, Government of Canada [GoC] bonds remain climbing and the $4B weekly Canadain mortgage bond [CMB] purchase program remains fully intact.
GoC bonds continue to rise, and CMBs hold steady
BoC balance sheet peaks at nearly $600B.
Not to mention, the $475B of assets held by the BoC still represents a 400% increase over what was held prior to the pandemic.
With employment increasing a modest 1.4% in February after falling a similar amount over the previous two months, the Canadian economy is still not in a healthy position:
Employment remains below pre-pandemic levels
It is reasonable to expect the BoC and Federal Reserve are not urgently seeking raising rates or dissolving their liquidity programs completely. Some have argued these loose fiscal policies are leading to inflation, could that be true? Let’s dig into some charts.
Inflation … or not? The Story of the United States Dollar:
Oil prices and growing demand recover, with gas prices in the US seeing a 30% year-over-year increase:
Weekly average US gasoline prices ramp upwards
Sounds like a lot, until we realize crude oil futures contracts went negative for the first time ever, and are now sitting only slightly above their seven-year average price:
Crude oil futures not far off their seven-year average
Another argument in favour of inflation has been the enormous M2 money stock expansion in the United States. M2 tracks cash, checking deposits, and easily convertible near money. M2 saw a monumental $370B weekly rate of growth for a year-over-year increase of >26%.
M2 money stocks sits at $19,571.4B compared to $15,000B pre-pandemic
Critically, the more important variable has been the extremely low velocity of this money stock. Pointing instead to a deflationary environment:
Money stock velocity reaches decade lows
In favour of the inflation thesis is the US Dollar Index crumbling 13% in the past 12 months:
Dollar index - March 2020 to present
Of particular importance is the USD/CAD exchange due to its risk on/risk off clarity. This currency pair saw USD fall 14.5% since the beginning of the Covid-19 outbreak:
USD/CAD - March 2020 to present
With stimulus hitting the pockets of North Americans, and the largest stock market crash since the Great Financial Crisis, we entered a ‘risk-on’ environment. Canadians and Americans had ample free time and money to gamble in the stock market, while equities traded at a hefty discount:
Standard & Poor ETF with >30% decline during the initial four weeks of the Covid-19 pandemic
Three key positions are taken by traders in this risk-on environment. Buying $CAD while selling $USD, buying $EUR while selling $USD, and buying emerging markets which rally against $USD:
EUR/USD - Euro increases 15.5% against the US dollar during the past 13 months.
A notable move on the upside considering the secular bear market that EUR/USD trades in:
EUR/USD - 2008 to present
Despite poor tourism, a major source of income for many emerging markets, the currency markets have allowed for favourable conditions to grow in other ways. With US dollars losing value and interest rates incredibly low, emerging markets were able to borrow valuable $USD and hold their economies together:
Templeton Emerging Markets Fund sees a 120% rally off the lows
Put simply, the ‘short’ US dollar trade was incredibly popular. But with one side of a trade overdone, there is the risk of it turning around sharply. Again, think of the ever so popular Gamestop fiasco. The $USD is coming around:
$USD is heavily bought by Chinese banks while selling the Yuan
A critical inflection point where leveraged funds become net buyers of the $USD
The US dollar has been heavily borrowed around the globe due to its depreciating value and simultaneous low interest rates. Federal Reserve officials claim to not expect a rate hike in 2022, but Fed funds futures markets are pricing in a 50% hike next year:
Fed funds futures forward curve expect rate hikes
In summary, not only have traders setup a potential whiplash reversal upwards in the $USD, but with interest rates potentially rising in the near-future, the heavily borrowed currency has the potential to suck up liquidity around the globe - a dollar milkshake. Emerging markets are aware of the liquidity trap that will occur, and countries like Brazil have given the go ahead to raise rates.
How does that affect the Canadian dollar, and our local Vancouver real estate market?
The Precarious Canadian Dollar
While the $USD appreciates in value as a whole, it has been difficult for it to appreciate relative to the $CAD. Why? Commodities are on a rip. Oil, lumber, copper, and other valuable resources are seeing huge increases from the lows as shown earlier. Soft commodities like corn and soybeans are seeing similar increases:
Corn futures:
Corn futures rally from $300 to $550 in seven months
Soybean futures:
Soybean futures ramp from $825 to $1,425 in eight months
Interestingly, even hog futures have seen unusual price appreciation:
Hog futures move from $35 to $100 in 12 months
Increased food prices have to be the result of loose fiscal policy and therefore inflation, right? Not entirely so. For several years, grains have seen a supply shortage due to various variables, including locusts. Additionally, China has been purchasing huge amounts of soft commodities and hogs due to a recent disease killing millions of their hogs.
A commodity push also comes from stimulus payments and social rules shifting consumption from services to durable goods that need to be produced. Manufacturers are pressured to purchase commodities while having trouble sourcing them. A supply-shortage leading to higher commodity prices.
Personal consumption expenditures see goods, not services, take a big lead
In short, the commodity rally has been supply-driven and not inflationary in itself.
A wonderful presentation by IceCap Asset Management details the rollover into deflation that we are seeing:
Emerging markets flip downwards
The commodity push slows down
The Canadian dollar begins topping
The 30 year bond rolls over
Interest rate futures are heavily oversold with many shorts piled in and ready to spiral upwards
Although we may not be seeing bonafide inflation, we are seeing pricey Canadian exports supporting the Canadian economy and therefore Canadian dollar. Canadian policy makers do not want a strong currency. This is a problem. As a country focused on commodity exports, real estate, and immigration, Canada thrives when the currency is weak, especially relative to the US dollar. How does this affect real estate?
As long as the Canadian dollar remains strong in the global economy and against the US dollar, the BoC will not be pressed to raise rates. The BoC has confirmed negative rates are a part of their tool kit, and in February the Bank of England stated that they too are looking into negative rates. If we do not see global growth, and the Canadian dollar doesn’t see devaluation, negative rates are coming.
However, even if the BoC doesn’t want to see rates rising, they might on their own:
The popular five-year fixed rates are moving up in Canada for the second time in the past several weeks.
Bond yield increases and swap mayhem moves the five-year fixed rate up another 10-15 basis points on the heels of a recent move. 1.39% in January and February, up to 1.68%. In 2018 we did not see a clear reduction in real estate activity until the five-year fixed went over 3.00%.
Lastly, there’s one topic I have not touched on yet affecting our local Vancouver market — foreign buyers.
Foreign Buyers:
A great part of the housing push seen in 2016 came from a healthy economy and foreign inflows. In contrast, the percent of BC’s non-resident home purchases in Greater Vancouver have been incredibly low:
113 non-resident buyers in January 2021, down nearly 38% from January 2020. Greater Vancouver specifically sees a 74% drop.
Although we may see the rate of purchasing from locals reduce in the coming months, Canada has goals to exceed the 400,000 goal for new residents, all of whom will need homes. For now, 2020 saw the slowest annual growth since 1916:
Canada sorely needs immigration for a thriving economy
The implication is that we have had purely local demand drive this housing froth. With vaccinations well under way across the globe, it is only a matter of months before immigration reopens and we see large demand for homes by incoming foreigners.
What Happens From Here?
At the local level, it’s hard to imagine we can continue to grow this speculative frenzy at the same rate. There simply aren’t enough buyers or sellers to let that happen. However, that does not mean absolute prices cannot continue to grow.
At the national level, the BoC is unlikely to voluntarily raise rates as commodities continue to rally in price as the world reopens and demand grows; therefore backing the Canadian dollar. Nonetheless, the US dollar rally and liquidity slurp from around the world will likely be enough to depreciate the Canadian dollar.
What does this mean for you as a buyer or seller of Vancouver real estate? The Canadian dollar depreciation will come while Canada sees significant immigration, reopening thriving sentiment, and the popular Spring season. Real estate price appreciation will slow down, but it is by no means done. These drivers will likely push real estate prices higher for the rest of 2021 and perhaps 2022.
If you are looking to buy or sell real estate, contact me at 778-866-7762 or email m@mbhogal.com
For the article with full references, please see below: