May 2, 2021 | Ka-boom

The next 48 may answer the question: is this it? The blow-off phase of a housing market that cannot possibly last?

In the next two days the Van and GTA real estate boards will drop their stats on a breathless, virus-weary  nation. Plus the other hot spots – Victoria, Halifax, Montreal, Squamish, Tillsonburg, Saint John, Hope, Sudbury, Woodstock (both of them), Kamloops… well, just about everywhere. This is now a pan-Canadian affliction. House lust.

What foretells an asset escalation with a dubious future?

Two things: (a) rapid price inflation and (b) explosive volume.

Nobody should doubt about either. Nationally, average sale prices have increased an historic 31.6% year/year, to a previously-unimaginable level of $717,000. The average detached in Toronto is $1.7 million and the typical property in the burbs is now seven-figures.

Prices are so high relative to incomes it now takes the annual wages of 12 families in Vancouver to buy one so-so house. Newbie working couples putting aside 10% of annual income need five years to gather a measly 6% down payment. And in the last five years real estate climbed steadily higher. Hopeless. And look what we’ve done to ourselves, relative to American households…

House price escalation in Canada vs the US

As for sales volumes, more history has been made.

Nationally, sales are in unprecedented territory, running 76% in March above 2020 levels. In fact the annualized increase over February was more than 60%. Sales in Toronto increased 174% (but part of March, 2020, was virus lockdown – like now). Sales in Van were up 126%, and have averaged more than 70% above the 10-year average. In London the increase was 56% – highest ever. In Victoria sales were 92% above year-ago levels and up 36% month/month. In Moncton sales hit another record high, surging 68%. In Nova Scotia a 66% jump in sales made for the best March on record.

That’s just a sample. It’s everywhere. From the Okanagan Valley to the Annapolis, from Windsor to Nelson. Both prices and volumes hit an apex in the last few weeks. Rational minds know this cannot last. History tells us so. This is an asset top.

The toll on families is growing. Despite cheapo mortgages, this price escalation – combined with the reckless behaviour of buyers (thanks to the blind auctions hosted by rapacious agents) – has far outstripped income growth. Mortgage loads are growing. People are reaching. They’re walking into decades of unprecedented debt at rates which can only go up.

The average two-income household now spends close to 40% of pre-tax earnings on real estate financing. In after-tax, take-home pay that easily tops 50% for most families. And this load is growing ever-larger, especially in BC and Ontario.

It’s a timebomb. Rates will grow enough in the next couple of years to inflate mortgage payments by 20% or more. The Bank of Canada’s already indicated its bond-buying, rate-suppression program is being curtailed. Its benchmark rate will increase a year ahead of schedule. Meanwhile the bond market will assuredly deliver higher yields (kicking up five-year mortgage costs) as (a) vaccinations rise from 30% of the population to 70% by August and (b) the economy reopens, leading to (c) even more inflation. (The price of everything is currently surging.)

As core inflation slips through 2%, then to 3% and beyond, current home loan rates will be relegated to historic footnotes. CBs will be throttling back on quantitative easing as the GDP expands (the US and Canada are rocketing ahead 7% now) because they know inflation cannot be allowed to go rogue. This will throw shackles off the bond market – the end of 2% five-year mortgages. At that point one of two things happens: (a) the vast bulk of people can no longer (ever) afford to own a home, or (b) prices start to fall.

Stay tuned.

Garth Turner May 2nd, 2021

Posted In: The Greater Fool

Next: Here’s One Fraud We Can Eliminate »