Juggling Dynamite

The segment below offers a good big-picture overview of the interplay between incomes, consumer spending, economic growth and home prices. Canadian data looks worse than the US, but, so far, Canadian banks have allowed negative amortization to compound principal higher where payments are insufficient to cover principal and interest payments.  Many variable-rate borrowers have had their amortization period extended well beyond 30 years in the process. Extend and pretend cannot continue indefinitely; a pick up in forced sales looks inevitable as unemployment ticks higher.

Bank of America just reported a big slowdown in consumer spending in America. Which is a major 2023 recession warning. And suggests that we could see job losses spike in future months with home prices and stock prices declining. Consumer spending on Bank of America credit/debit cards declined most in Furniture, Home Improvement, and Luxury Goods. While spending still rose for restaurants. Overall, spending was down -1.2% YoY from last April. Declining consumer spending is a big problem for the US Economy because 70% of GDP comes from spending. So it means our economy is decline. And likely that businesses will continue to lay off workers in 2023.

Another company that had a concerning report was Airbnb. Their stock price is down by 15% in the last week because they had a “muted” outlook for travel demand in the rest of 2023. A slowdown in Airbnb bookings would mean that certain housing markets might have issues. The ones with the biggest drops in occupancy include Miami, Philadelphia, Fort Lauderdale, Austin, San Antonio, and Cape Coral.  Here is a direct video link.

For repricing progress to date in major Canadian cities, see more here: Average Canadian home price $716,000 in April.

Baby boomers and two decades of rock-bottom interest rates drove a structural boost to housing demand as older buyers/investors sought bigger homes as well as recreational and rental properties. As interest rates have risen and boomers die off, the question is who will buy from them and at what price?

There are two factors at play. First, the baby boomer generation is very big. Second, they are much more likely to own property than other cohorts.

In the US, the number of owner-occupiers who will stop owning homes between 2026 and 2036 will number between 13.1 million and 14.6 million, according to a 2018 paper by Dowell Myers and Patrick Simmons.

“The beginning of a mass exodus looms on the horizon,” the economists warned.

Because of the relatively large size of the baby boomer generation, the number of homeowners exiting the sector will be 42pc higher than it will have been in the preceding 10 years.

The trend is mirrored in the UK. Between 2008 and 2020, the share of homes owned by people aged over 75 jumped from 13.3pc to 18.1pc – equivalent to an extra 837,000 properties – according to the English Housing Survey.

Not only are boomers more likely to own property, but they are more likely to own more than one: holiday home ownership and buy-to-let ownership is extremely heavily concentrated amongst older generations.

Pandemic-era debt deferrals, government handouts and easy credit all worked to kick insolvency problems down the road. Now many are out of extend and pretend options.

Doug Hoyes, co-founder of Hoyes, Michalos & Associates, joins BNN Bloomberg to discuss the record number of consumer proposals in Canada. He says that the upward trend in insolvency is a continuation from before the pandemic and COVID-19 related debts only exacerbate the problem. Here is a direct video link.

See Consumer Insolvency Update, March 2023:

Canada-wide volumes were up 36.2% year-over-year and 27.6% higher than in February 2023. Year-over-year Ontario insolvencies increased by 31.6% and were 28.1% higher than in February.

The acceleration in consumer insolvencies is now reaching the higher end of our predicted overall growth of 20% to 30% for 2023. We would not be surprised to see insolvencies continue to grow at these, and possibly even higher rates in the coming months.

Homeowner insolvencies have now returned to pre-pandemic levels. Our Homeowners Bankruptcy Index was 3.9% in March 2023 and remains above 2022 levels.