June 8, 2021 | Let’s Worry

Kelowna has its charms. Hills. A big lake. Aquatic monster. The barmaids at Joey Restaurant.

This BC town also looks like Mississauga in a Tommy Bahama shirt and has a real estate market just as nutso. As prices in the 905 have gone ballistic thanks to the unaffordability of Toronto, so has Kelowna erupted thanks to the housing disaster in Vancouver. Prices in Mississaugs passed the $1 million mark a month or two ago and the same fate has befallen K-town now.

As of yesterday, Kelowna broke through that mark, with detached houses gaining $23,000 in the last month. Look at the chart below, says our resident on-the-ground blog dog analyst. “If we get the 8 rate hikes that some are forecasting for a +2% increase in rates within the next year, then the leg down adjustment will be doubled to a -$302,871 drop in price (from whatever we peak out at in the coming months) on the average Kelowna home by 2023.”

Click to enlarge. Wear PPE.

If that were to happen, all those dewy-eyed buyers in 2021 would be in for a massive shock. And that’s why nobody in the middle of a boom ever believes it can end. But the chart above is one of human emotion, not income gains or economic expansion. It typifies nicely why Canada is in such a delicate place these days.

If you feel like worrying, here are fine places to start.

Who needs to make stuff anymore?
Instead, let’s just sell each other houses! Remember that huge 5.9% spike in annualized gross domestic product (GDP) we told you about recently? It was trumpeted as clear evidence  the economy is roaring back to life as Covid crumbles. But then we heard 68,000 more people lost work in May, and now news that 3.9% of that GDP gain – or two-thirds of the economic pop – was due to residential real estate. Says Capital Economics: ““Residential investment now accounts for 10.3% of nominal GDP, which, strikingly, means it is a larger component than business investment.” Oh, snap.

What do they know that we don’t?
Fannie Mae is the US housing giant and routinely runs a Home Price Sentiment Index. The latest results are…wow. Never before have as many said this is an awful, lousy and dangerous moment to dive in. Surging prices, scant supply, greedy sellers and rapacious realtors have taken their toll. In March over half of Americans were gung-ho on buying. Now just 35% would do so.  Conversely, 56% believe this is a terrible time for real estate.

Meanwhile in Canada? The latest Nik Nanos poll done for Bloomberg gives real estate a positive rating of 61.58%, up from a month ago and 25 points higher than the average for the last 13 years (when houses cost a lot less). So, who’s got this right? Stay tuned.

Borrow ‘til you bleed.
A trillion has a lot of zeroes. Twelve. It’s a thousand times a billion, which is a thousand millions. The entire Canadian economy is $1.97 trillion. And guess how much money households now owe? It’s $2.1 trillion. This comes thanks to a massive 41% increase in new mortgage borrowing in the last few months, compared to the same period in 2020. The size of mortgages people are taking has also grown – by a fifth. The Kelowna chart you just blew past says why. We’ve lost our minds. We no longer fear debt. Low rates, WFH savings, government cheques and serious FOMO have addled our brains and brought us to the point when over 20% of all new borrowers have debt-to-income ratios exceeding 450%.

Warns the credit agency which keeps tabs on our steaming pile of indebtedness: ““Successful vaccine rollouts will be the critical factor in opening up the economy, which will have a big impact on consumer spending and debt management. Canadians should be preparing themselves for a point in time, which will likely come in this calendar year, when governments begin to rein in support mechanisms.”

Refi, then rinse and repeat.
New mortgage borrowing is off the chart, but it’s not just the kids – newbie buyers – who are going to the well. Increasingly Canadians are refinancing their homes, turning them into ATMs, sucking out equity and using it for other purposes – like buying more real estate. TransUnion reports that mortgage originations have surged 26% year/year. Much of that is due to buying activity, but a whopping 55% is coming from existing customers renewing and getting refis. As we all know (or should) these interest rates will not hold for much longer and everyone borrowing today will be renewing at a bigger number down the road.

In summary: a disproportionate amount of the economy as real estate… historic prices detached from incomes… frothy buyer sentiment and outsized expectations… record levels of personal and housing debt… teaser interest rates and equity take-outs… what could possibly go wrong?

Garth Turner June 8th, 2021

Posted In: The Greater Fool

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