DATE

Collateral Damage

Steve Saretsky -

Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades there have only been two slower months of November (2008 and 2018). Prices are still trickling lower, despite inventory levels remaining surprisingly low. It’s a similar story in the GTA, home sales fell 54% from last year, and were the lowest since November 2008. A four hundred basis point rise in mortgage rates is going about as well as one would expect, and we’re about to get another Bank of Canada rate hike this Wednesday. The good news is this is probably the end of the line for the Bank of Canada, at least that’s my view. Macklem will seal the deal with another 25bps and bring this rate hike cycle to a close at 4%. A survey of Bloomberg economists seem to think the same, suggesting Governor Tiff Macklem can comfortably leave their benchmark rate as much as 100 basis points lower than the Fed.

I’m not going to list all the reasons why the Bank of Canada has a lot less room than the Fed, they’ve been listed a million times. This country is suffocating in debt and that last few years of growth were largely driven through even more debt. The growth in mortgage debt as a percentage of GDP nearly touched 8% this cycle.

These types of excesses are always followed by hangovers. According to CIBC, “Mortgage originations are now falling by close to 30% on a year-over-year basis. We estimate that in 2022, the rapid rise in mortgage rates directly and immediately impacted one quarter of borrowers. We estimate that before the pandemic, no less than one-third of investors were in negative cashflow territory. Given the tightening in monetary policy that has occurred since then, and the additional rate hikes that are still forthcoming, that negative cash flow position is certainly broader and deeper than it was pre-pandemic.”

Source: CIBC

In other words, we pulled a lot of demand forward, a hangover was inevitable. But when you suddenly add a 400bps move in mortgage rates in less than a year there becomes a lot of collateral damage. We’re increasingly seeing stories of investors eating big monthly losses as interest payments on their mortgage surge higher with an inability to pass along those costs in rent controlled provinces like BC & Ontario. For some there are very few options but to sell. For others who can hold out, it should not be forgotten that an estimated 700,000 individuals are entering Canada in 2022 (including new immigrants, foreign students, non-permanent residents, and newcomers from Ukraine on a special 3-year visa). Despite the destruction of some Mom & Pop landlords, I suspect we will still be talking about a housing crisis five years from now.

Join the Monday Newsletter

Every Monday morning you'll receive a short and entertaining round-up of news on the Vancouver & Canadian Real Estate markets.

"*" indicates required fields

The Canadian Economy

Steve Saretsky -

Happy Monday Morning! Canadian inflation data drops this week on Wednesday, January 17th. This will be an important headline given that the Bank of Canada is set to meet the following week on January 25th. As of right now the market is still expecting a 25bps rate hike, but that...

Steve Saretsky -

Happy Monday Morning! Back to our regularly scheduled programming after a few weeks off during the holidays. Last year was an eventful year across the Canadian Real Estate spectrum to say the least. I figured i’d start off the New Year with a quick sentiment check. And the survey says…...

Steve Saretsky -

Bank of Canada Governor, Tiff Macklem, delivered some final comments this week at a keynote speech in BC. He didn’t mince words following the fastest rate hiking cycle in recent history. “There’s no question that if you bought a house near the peak, you took a variable rate mortgage with...

Steve Saretsky -

To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The...

Steve Saretsky -

Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades...

Get the Saretsky Report to your email every month

The Saretsky Report. December 2022