No New Couches

Steve Saretsky -

As discussed last week, our early indicators pointed to Greater Vancouver home sales falling to a 22 year low in home sales for July. The Real Estate board has officially confirmed the precipitous decline. July sales were also 35% below the ten year average, and the typical price of a home is now down 4.5% as per the lagging home price index. In reality, prices are down anywhere from about 5-15% depending on the location and the product type. To put it simply, the more it went up during the pandemic, the more it is correcting now. Nature is healing.

Things could be worse here, just look at Toronto. The GTA has recorded three consecutive months of home sales printing twenty year lows. The price of a typical home, as measured by the home price index, declined 3.9% last month. For anyone following along at home, house prices shedding 4% per month is far from normal, and is certainly not healthy despite the obvious overvaluation preceding the decline. Toronto area home prices are now down 13% from the peak, shedding $178,000 off the price of a typical home.

It’s not hard to figure out what happens when Canada’s two largest housing markets become illiquid. Remember, over the past five years Real Estate and consumption have accounted for nearly 85% of REAL GDP growth. Canada lost 31,000 jobs last month, the second month in a row of declines after shedding 43,000 jobs in June. Housing is slowing, and the number one driver of household wealth (Real Estate) is falling in price. What do you do when you feel less wealthy? You cut spending.

Interesting anecdote here, the popular Canadian furniture store, Article, just slashed its workforce by 17%. The first round of layoffs in its eleven year history. What’s more enlightening is the comments from the CEO. “Like many eCommerce companies, we benefited tremendously from the demand increase from Covid. We anticipated the trend to online purchasing would be sustained — that did not happen, and it has since returned to pre-Covid trends.”

In plain english, we benefitted tremendously from back to back years of record housing sales created via artificially cheap and abundant credit, and now that people have stopped buying houses they no longer need new couches.

You can multiply this across many industries. The sudden surge in interest costs on a massively indebted private sector is slowing economic growth and denting households savings. Average household net savings fell 44 per cent to $1,900 in the first quarter from the year before, according to Statistics Canada. Meanwhile, nominal wage growth in Canada is running at a mere 3.3%, well below the pace of inflation.

The bond market is confirming what we already know, higher interest rates are going to choke the economy. The yield curve is now deeply inverted, with the spread between the Canada 2 year / 10 year bond now sitting at -50bps, a classic recession signal. More expensive access to credit in an already slowing and poor long-term growth environment leads the private sector to be more defensive, which compounds on the already ongoing cyclical slowdown. An inverted curve doesn’t only predict slowdowns, but it often contributes to them.

There’s a reason Canadian banks haven’t cut mortgage rates despite the 5 year bond yield collapsing nearly 100bps over the past month.

Three Things I’m Watching:

1. Household savings are falling, as inflation and higher interest rates bite. (Source: The Globe & Mail)

2. Toronto home prices off 13% from the peak, down 3.9% last month. (Source: Better Dwelling)

3. Most inverted yield curve in G-7 is Canadian yield curve. Most inverted in history of chart data. (Source: Ritesh Jain)

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The Saretsky Report. December 2022