Juggling Dynamite

Better Dwelling co-founder and housing analyst Stephen Punwasi offers an archival antidote to the “running out of land” mania now dominating the consensus view.  Headlines from past Canadian housing bubbles since the 1930s confirm that this baseless sales pitch has resurfaced before the bust each time.  Well worth the review, see:  Canada is running out of land.  It Does that Every Few Years.  Here’s a taste:

Running out of land is as Canadian as hockey, maple syrup, or laundering money for global crime networks. In fact, Canadians love running out of land so much, they do it every few years.

Many are currently justifying high home prices by claiming a lack of land in Canada. This isn’t just something people have come to conclude themselves. It’s supported by politicians, (some) academics, and real estate developers. It doesn’t matter where either. From Vancouver to Toronto, and even into smaller cities like Halifax.

People are convinced this is the last chance to buy a house because the country is running out of land. Those who buy a condo now will live like the Barons and Baroness of the past. Forever their space in the country will be secured. Those who don’t will toile in the code mines. Hacking away at bits for Microzon, a conglomerate that owns everything. I’m pessimistic, but not even I am that pessimistic.

It turns out Canadians feel this way at the top of every real estate bubble though. Going through newspaper archives all the way back to the 1930s, we can find a whack of examples. It’s always the last year people will be able to buy. There’s no more land…

The Bank of Canada is now expected to hike the base interest rate by .50% at its next several meetings toward 2.5% by year-end. The bond market has sold off sharply to price in these aspirations, so fixed mortgage rates (priced off bond yields) are already higher. The mortgage math matters:

Before the pandemic, the median Canadian home price was $580,000 when record monetary and fiscal interventions pushed five-year fixed mortgage rates to 1.5%. A conventional five-year fixed mortgage payment at 1.5% (with 25% down) on a median-priced home was $1855 per month.

Fast forward two years, with the median Canadian home price now 52% higher at $880,000, the same five-year fixed mortgage rate is above 3.5%, and the monthly payment on that median home is now $3475–87% higher than in 2020.

Given the rise in 5-year Canadian bond yields to date, the five-year fixed mortgage rate should move above 4% shortly, and the monthly payment on that same median home price will be just over $3661 per month–a double from 2020.

Moreover, the bulk of Canada’s population lives in the southern half of Ontario and British Columbia where median home prices (condos and single-family houses) are now above $1 million, which means conventional 5-year fixed mortgage payments at 3.5% are north of $5200 a month from $3200 in 2020.

The spike in debt-service costs is already free-cash-flow-crushing. An inflating housing bubble enabled household spending and real estate speculation over the last decade. There is no way that a doubling in mortgage payments is not deleterious to those trends and housing-dependent economic activity.

Yet,  mainstream economic forecasters (most of whom work for banks and other lenders) are not pencilling in declining home prices nor rising unemployment as they forecast higher interest rates. BC realtor Steve Saretsky calls BS on this in his latest podcast.

The Canada 5 year bond yield is ripping higher. This is repricing mortgage rates across the country. We could see 5 year fixed rate mortgages north of 4% in the next couple of weeks. This will act as a brake on the housing market, and potentially worse if rates hold here for a period of time. Proceed with caution. Here is a direct video link.

The free-for-all of asset bubbles builds a world of hurt for would-be “investors” who neglect math and due diligence work.  Old lessons are ripe for relearning here.  See:  Real estate company collapses, 500 homes affected, $10m from investors across Canada missing.  “Fund-A-Flip…hassle-free landlord programs”…so many red flags…

A judge has assigned a special investigator to look into the collapse of a Saskatoon real estate group in January. Epic Alliance managed more than 400 properties in Saskatoon, most in core neighbourhoods. It also had a pool of more than $10 million from investors. Here is a direct video link.