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