Cash Flows

Steve Saretsky -

Canadians lust for owning Real Estate continues to prove insatiable. Over the past few months there has been a flurry of media headlines pronouncing the resurgence across large parts of the nation. Nationally, we already know home sales bounced 23% year-over-year in December, and early indications suggest that should continue in January.

The trend in rising sales activity is in large part spurred on from Greater Vancouver, where home sales jumped 47% year-over-year for January, and should officially hit media headlines in the next couple of days. Of course, the large spike in activity should be taken into context. January 2019 was one of the slowest in recent history, thanks to concerns of a global recession and rising interest rates, which saw five year fixed mortgage rates jump to 3.5%. Fast forward twelve months and mortgage rates have plunged, now down to 2.79% with market participants mostly ignoring the persistent softness in the economy- Canadian GDP is expected to have a zero handle in the fourth quarter of 2019.

Borrowing has resumed in Canada, at least for mortgages. Residential mortgage credit growth on a 3 month annualized pace is growing at 6.72%, significantly faster than prior to the introduction of the B-20 mortgage stress test two years ago. This has our financial regulators, OSFI, somewhat concerned. In a recent note, OSFI highlighted the resurgence of highly indebted/ over leveraged borrowers. The proportion of new uninsured mortgage loans that exceed 450% of a borrower’s income rose from 14% to 17.5% in 2019- nearly retesting its highs set prior to the stress test.

Of further interest, the resurgence in the Canadian housing market comes at a time when there is growing concerns of softness in rental market. Industry professionals in Vancouver & Toronto are reporting a noticeable cool down. David Hutniak, chief executive officer of LandlordBC, commented on the prevailing situation in BC in an interview with the Globe & Mail.

“I was just in a meeting with about 15 folks from our sector who represent the large landlords – from big property managers to medium-size owners – about what is going on in the market. … These folks represent a significant number of the units in the market, and not just Vancouver, but Richmond, Burnaby and some units in North Vancouver.

“I was hearing that we are seeing a softening of rent and vacancy rates are loosening up. It’s taking longer to actually fill vacant units. The West End is probably the most pronounced – the rents are starting to fall. Vacancy rates are increasing in the existing stock and it’s taking longer to fill the units. You just have to go along Davie Street to see what’s happening there. A year ago when I was asked if the vacant homes tax would have an impact on long-term rental, at that time I said, ‘absolutely not.’ But in talking to these folks, they are saying it absolutely is happening now.”

Meanwhile, in Toronto, as per Ben Rabidoux of Northcove Advisors, condos listed for rent on the MLS hit a new record in Q4, up 30% year-over-year in spite of new completions falling nearly 40% from last year. Completions are expected to ramp up over the next few years, with CMHC suggesting about 50% of new condos ultimately end up in the rental pool.

In other words, future cash flows for landlords may come under pressure, which is currently not being priced in.

This post is via my Monday Morning Weekly Newsletter. You can join Here. 

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The Saretsky Report. December 2022