Juggling Dynamite

Epic financial risk and asset markets priced as if there’s none; what could go wrong?

The markets have climbed higher despite continuing concerns around the shutdown, tariffs and inflation. The S&P 500 and Nasdaq have set records more than 30 times this year and other data suggest the economy is chugging at a steady clip. But for the majority of Americans, this economy is landing very differently right now, and it’s hardly good times. Economics correspondent Paul Solman reports. Here is a direct video link.

Also, on topic, see Big Banks Cash in on Well-Heeled Borrowers:

Having available credit is a key way to keep spending, especially if wages, or the values of consumers’ assets such as stocks or homes, slow or stagnate.

For consumers who have them, there is also an incentive to spend via banks’ rewards cards. JPMorgan Chase recently raised the annual fee on its Sapphire Reserve credit card to $795, and added new benefits. Despite the higher fee, JPMorgan Chief Financial Officer Jeremy Barnum told analysts this week that “this has already been the best year ever for new account acquisitions for our Sapphire portfolio.”

Wells Fargo has been rapidly growing in cards, with new card accounts up 9% through the first three quarters of the year from last year. The bank told analysts this week that it has been focused on tapping existing clients to expand its card relationships, including in wealth management.

“We are not fully meeting the lending, deposit and payment needs of our existing wealth clients,” Wells Fargo Chief Executive Charlie Scharf told analysts. Wells Fargo has a program called Premier, which integrates products across banking, lending and investing, and is aimed at clients with $250,000 or more in certain balances. Net investment inflows into Premier were up 47% in the first nine months of this year, the bank said.

If the economy was heading for a slowdown, big banks might not be able to avoid it. But they also won’t necessarily be the first indicator of trouble.

A couple of must-read articles from the Globe this week examine Canada’s policy errors around immigration and housing–two tangential, interconnected themes with far-reaching impacts for our economy, present and future.

See, How Canada got immigration right for so long–and then got it very, very wrong:

Canada conducted a decade-long experiment. The experiment’s principal investigator was the Trudeau government, assisted and enabled by the provinces, the business community and much of the higher-education sector. They were opposed by essentially nobody.

The hypothesis was that Canada, already one of the developed world’s highest-immigration countries, could jump-start its slow-growth economy through higher immigration and lower standards.

The experiment was not a success.

Between 2015 and 2024, Canada was arguably the rich world’s poorest economic performer. Real GDP per capita – economic growth per person, less inflation – grew by 2 per cent, according to the OECD. Not 2 per cent per year. Two per cent, in total, over a decade. During the same period, U.S. GDP per capita was up almost 20 per cent.

By 2025, real GDP per capita was no higher than it had been in 2019.

It turned out that supercharged population growth via record-high immigration was not a panacea for the country’s economic challenges. It had, if anything, made the challenges more challenging.

Then see, Ten Charts that explain Canada’s messy and complicated Housing Markets:

Back in early 2022, housing markets across Canada – no stranger to bouts of euphoria – were riding a rally with little precedent.

The representative national home price hit $837,400 in February that year, an increase of 58 per cent – or more than $300,000 – in just three years, according to the Canadian Real Estate Association.

With hindsight, it was the peak of the madness. The Bank of Canada started to jack up interest rates to tame inflation, which sent the real estate industry into a tailspin. The typical home price has now slipped below $690,000, and the declines have been precipitous in the most speculative corners of British Columbia and Ontario.

Lower prices and lower interest rates have started to improve housing affordability, but deeper declines for both are yet needed.

…Even with prices on the decline, homes are still prohibitively expensive for many buyers. Various metrics show that affordability has improved, but not by much. The Bank of Canada is poised to cut interest rates a couple more times in the coming months, but economists aren’t expecting a return to near-zero levels.

All to say, Canada’s housing crisis isn’t going anywhere, despite taking a back seat to trade concerns of late.

The Canadian housing bubble has been deflating since February 2022, and there’s room for it to run.

We highlighted the mania and frenzy of financially destructive behaviours in real time, noting that once bubbles pop, property prices typically take years to recover.

BMO Senior Economist Robert Kavcic apparently agrees. In a recent note highlighted on Better Dwelling.com, Kravcic observes that “While many are searching for bubbles in the equity market, one continues to undo itself as we speak—Canadian real estate… We’ll reiterate, as we have from the start, that this cycle will be measured in years, not months or quarters.”

Kavcic notes that the current nominal home price decline, led by Ontario (in dark blue below), is tracking the 1990s Ontario-led bust (light blue below), and US price trends after the 2007 bubble burst (in orange).If prices continue this trajectory, it could take another 5 years to recover the levels seen in 2022. Kravcic adds: “The bear market in housing staggers on until affordability and investment dynamics reset themselves.” 

We aren’t there yet. Any homeowner who is struggling today and considering options, or anyone who is thinking of buying, would be wise to consider long-standing affordability norms:

• An ‘affordable’ home price has long been considered 3 times the pretax household income.

Even though the median Canadian home sale price in July ($673k) was 20% lower than the $840k in February 2022, it remains more than 7.2x the median pretax household income nationally of $93k. In major centers like the Greater Toronto and Vancouver areas, the median home price is still more than 11 times and 14 times the median household income.

• Affordable shelter costs (rent or mortgage payment, utilities, taxes, insurance and maintenance costs) are less than 30% of pretax household income.

For example, affordable shelter costs (rent or mortgage, utilities, taxes, insurance, and maintenance) for a household that earns 100k annually pretax would be 30k a year (2500/month).

• From an investor’s perspective, annual rents that yield more than 6.7% of the home price.

For example, a home priced at 800k would need to yield a minimum rent of $53,600 a year ($4,467 a month) to be considered a favourable investment.

BMO explains that Canada’s late great property bubble was fueled by a rare confluence of record immigration, pandemic migration, excess liquidity, ultra-low rates, maxed-out valuations, and—most importantly—speculative market psychology. None of that is likely to return in the near future.