May 7, 2021 | Help Wanted

The job numbers suck. Some people wonder what impact this might have on real estate. The economic recovery. On interest rates.

In case you missed it, Canada shed 207,000 positions in March. That just about nuked the gains seen in February. The jobless rate has gone in the wrong direction – up. Over 129,000 full-time paycheques vanished and close to seventy-eight thousand part-timers lost work. In the US, more than a quarter million new hires stared working last month in stark contrast to us, but this was far less than expected. Seems American employers can’t find enough people who want to work now that Uncle Joe sent everybody a fat cheque. In Canada, it’s the slimy little pathogen that’s eating the GDP.

So what happened upon the news?

The US dollar went down (disappointing labour stats) pushing the loonie up (despite our bad numbers). Bond yields fell sharply along with inflation expectations. That will put an end (temporarily) to the upward thrust of mortgage rates. Stock markets shrugged it all off, since traders and investors still have Roaring Twenties fever. Vaccines will triumph. Covid will fade. Global growth will resume. Companies will make boodles. Up she goes.

Now, back to real estate. This week we mused that peak house might be upon us as markets in Van and the GTA showed signs of lower sales and higher inventory. But in the pursuit of balance, this egalitarian and well-muscled blog now presents an alternative view. Two of them actually.

First, here’s what the government says.

Canada Mortgage and Housing Corp has done a 180. You may recall the now-departed boss, Evan Siddall, warned early in the pandemic that real estate prices could fall as much as 18%. Instead they went up 30%. Nobody anticipated that Millennial house lust combined with cheap money, slithery realtors, WFH and pliant lenders would create an historic bubble in the middle of a global health crisis, quarantines, job less and Main Street mayhem. But it happened. Re/Max, 1. Evan, 0.

The dark dude is gone, and now CMHC’s gone back to its historic role of pimping the market. The current forecast is that prices will continue to rise in 2021, adding about 14% to the average home’s value. Sales will power ahead to 602,300 from 550,000 last year.

Then what? Will it be over?

Nope: “Economic conditions are expected to return to pre-pandemic levels by the end of 2023, if broad immunity to COVID-19 takes hold by the end of 2021,” says Bob Dugan, the chief economist. “This includes the pace of home sales and prices, which we expect to see moderate from 2020 highs over the same period.” Sales will stay elevated for next year, too, and the average price will increase another 9% or so.

Is this realistic when incomes are advancing less than 2% annually? What about the Covid lockdowns that just crushed the jobs numbers?

Well, real estate is no longer rational. FOMO has gripped the nation. So when enough people think something will rise in value – and buy – values rise. Of course, household debt swells right along with it. And risk.

In Vancouver, meanwhile, where the average inner-city house is just one used Kia less than the $2 million mark, bearish analyst Dane Eitel seems to be throwing in the towel. As you may recall, he’s been quoted on this blog over the last two years warning the YVR market was wholly unsustainable, unsupported by the technicals that he follows.

So, wassup Dane?

The big news out of Van is a 46% jump in inventory of homes for sale over the last couple of months, while in 20 hoods he tracks, prices have failed to rise in 11 of them. “The perfect storm of historically low inventory coupled with immediate demand for larger accommodations and ultra low interest rates is beginning to fade,” he concludes.

But wait. Prices are still rising, albeit more slowly. Instead of making $37,000 a month on their houses, owners are now seeing a measly $14,000 appreciation. Eitel also ‘fesses that the market has yet to peak. What happens after that moment comes?

“The possibility of a 8-10% correction after the peak occurs is realistic. That would imply a retest os the previous market cycle high of $1.830M. To expect prices to correct below the previous channel is an unlikely outcome. More likely is an evolution out of the growth trend which increased home values over $386,000 to a period of sideways action, as price discovery confirms the previous technical break out.”

Translation: up, then down a little, then sideways. No crash because, “the Bank of Canada has created an artificial floor to home values,” through its quantitative-easing, mortgage-bond-buying frenzy.

What are we to make of this?

Beats me. I just come here for the dog pix. But when everybody’s throwing in the towel, it’s usually time to worry.

Garth Turner May 7th, 2021

Posted In: The Greater Fool

Next: Lessons To Learn From Michael Lee-Chin and Mean Reversion »