Time for your cheat sheet on this week’s top stories.
Canadians devote much more income to debt payments than their G7 peers. Households in the country had an average debt service ratio (DSR) of 12.4% of income in Q4 2020. To contrast, the US was only at 7.6%, and the average for the G7 excluding Canada is 6.9% of income. Canadians even spend a larger share of income on debt payments than Americans in 2008.
Canada is now home to the second oldest real estate bubble in the world. Federal Reserve data shows the market first became exuberant 24 quarters ago. It hasn’t seen a significant correction since then, leading to further inefficiencies. Germany is the only other advanced economy with a longer running bubble. The country is one quarter older, but has only seen half the price growth since 2005.
Researchers at the Bank of Canada say supply plays a role in home prices, but it’s not responsible for all gains. The central bank found the median supply elasticity in Canada is similar to that seen in the US. They also found price growth in Canada is far greater than supply could have driven. In other words, more supply won’t necessarily lower prices by much. Other factors need to slow, such as credit.
A national newspaper quoted BMO to dismiss high inflation, and they want to be clear — it’s a problem. CPI showed annual growth higher than 4%, and it’s related to a base effect. However, it’s not all just the base effect. The bank sees an average annual growth of 3% through next year, about 50% higher than target. They’re firmly on team “high inflation.”
Canadian new housing starts are slowing, but there’s no need to worry about a supply shortage. The seasonally adjusted annual rate (SAAR) trend fell to 283,971 units in August, down from 286,076 a month before. It’s a drop, but still significantly higher than it has been over the past few years, and a little below the record. Starts tend to appear in the market 18 to 24 months after, so we haven’t even seen the rise contribute to supply.
Canadian real estate prices growth is slowing as demand tapers faster than supply. CREA reported a seasonally adjusted SNLR of 72.4% in August, down from 73.6% the month before. It’s a tight market in the grand scheme of things, but there is certainly a lot less pressure on inventory. Consequently, the rate of growth for the typical home declined for another month.
Canadian inflation ripped to the highest level in almost two decades. Annual growth of the CPI reached 4.1% in August, up from 3.7% in the previous month. It was the highest print since March 2003, and shelter, one of the largest components, is behind the drive. There is some base effect, but as we dive through the data, we show it’s far from the only reason it’s elevated.
Canadian home sales fell to one of the lowest levels in over a year, as the market continues to cool. Seasonally adjusted sales fell to 48,379 units in August, down 0.5% from the previous month. Many attribute this to falling inventory, but CREA data shows 66,830 new listings, up 1.2% over the same period. Supply is higher on a seasonal basis, which means it isn’t the reason sales are slowing.
Canada is facing a very large shortage of trade workers, and it’s going to cost consumers more. The forecast shortfall of registered apprentices is 60,000 people by 2025. This is only partially due to the pandemic’s impact, which saw a 37% drop in registrations last year. Previous years also failed to attract enough, including a specially designed immigration program. With surging demand and such a large shortage, the cost of their labor is sure to surge higher. Rising costs tend to get passed onto consumers.
Canadian wealth is soaring relative to debt, but a bank exec warned this might happen and it can be a mirage. Household assets increased 3.6% in Q2 2021, the fifth consecutive quarter to see it rise. National Bank estimates households saw wealth rise 23% since the bottom of the pandemic. Debt is fast growing, but not this fast. As a result, the debt to asset ratio dropped to 16%, the lowest since the early 2000s.
It might seem like the magic money printer cured all problems, but that’s not the case. In a quarterly earnings call earlier this year, a BMO exec warned equity may be “exaggerated.” This is a similar data issue, where the net value of assets are likely inflated. The wealth effect will still be real, and people will probably spend more due to feeling rich. A perceived rise in wealth driven spending, that might be a mirage can be problematic though.
Canadian building investment made a sharp drop, but it’s still much higher than usual. The value of investment reached $18.1 billion in July, down 1.7% from the previous month. If compared to a year before, this represents a 17.6% increase. Stat Can said the slight taper was due to a decline in residential housing. That said, overall investment is still very high, especially compared to prior years.
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