This week’s top stories: Canadian real estate is overvalued and a bank suggests it’s madness, not supply


It’s time for your cheat sheet on this week’s top stories.

Canadian real estate

Madness or refueling? Real estate prices in Canada don’t add up: BMO

Real estate prices in Canada are rising even faster than during the bubble of the late 1980s. Annual growth reached 28% in January 2022, with prices rising 46.4% over the past two years. The emerging global economic powers are not the cities driving this record growth, but the small towns. Canada’s oldest bank asks investors to consider whether it’s more likely that all small towns are suffering from a shortage of inventory at the same time. Or has the madness of the crowd taken over and shoppers become exuberant?

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Canadian Parliament warns that real estate prices are up to 50% overvalued

Canada’s Parliamentary Budget Officer is warning politicians that housing is seriously overpriced. They estimate that Toronto, Hamilton, Halifax and Ottawa were overvalued by more than 50%. Vancouver, Montreal and Victoria were overvalued by 30-45%. As households stretch their budget to buy, they warn that households will become more vulnerable.

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Canadian condos are often overpriced due to low reserve funds: report

Canadian condos are often overpriced due to their reserve fund balances. The Canadian Institute of Actuaries released a massive 140-page study on reserve funds and condominium regulation. What they discovered is that a number of them don’t have enough cash to handle the significant future maintenance costs. By postponing saving for a rainy day, buyers could be hit with a massive bill to make up for the lack of caution. This will have a sudden and dramatic impact on a property’s valuation, so double-check reservations when buying.

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Canada’s yield curve flattens as investors lower long-term growth expectations

Canada’s yield curve is flattening, and that’s bad news for forecasts. The spread between 10 and 2-year government bonds fell to just 37.6 basis points on February 14. This is down from 93.1 basis points a year ago and 130.6 basis points at the peak of the cycle, when rates likely should have been raised. When interest rates rise to calm inflation, they are likely to reverse and the spread becomes negative. If that happens, expectations are as good as they come and a recession is on the horizon.

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Canada’s new home construction forecast set to slow significantly, says Desjardins

Canada’s construction boom is expected to slow this year after hitting a near-record high. Desjardins expects new home starts to fall to 225,100 in 2022, down 17.0% from a year ago. They also forecast another 4.7% drop in 2023 on top of this year’s drop. The combination of higher rates and the recent construction boom should satisfy demand.

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Canada’s economy peaked long before the pandemic when measured on a per capita basis

Canada’s gross domestic product (GDP) is less impressive when adjusted for population. Real GDP per capita peaked in the second quarter of 2019, two full quarters ahead of aggregate GDP. The current level of GDP is more than double the decline from peak, when adjusting on a per capita basis. The economy does not grow as long as it just adds more economic units (people).

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Inflation pressure in Canada widens across all categories as it hits 30-year high

Inflation in Canada is at a 30-year high, and it’s getting more rigid. The consumer price index (CPI) came in at 5.1% in January, a sharp rise in annual growth from 4.8% the previous month. More than 83% of the 18 major categories are now growing above the target annual rate. As inflation spreads to more components, it becomes even more difficult to cool it down.

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New data shows Canada still has 1.3 million vacant homes, some improvements seen

The problem of vacant homes in Canada is improving, but there are still more than 1.3 million. The latest census found 1.31 million vacant homes in 2021, down 2.62% from five years ago. This represents about 8.0% of the country’s housing stock, up from 8.7% in the previous report. Vancouver’s Vacant Home Tax appears to be a winner, drastically reducing the number of units in the city in such a short period of time. Toronto, on the other hand, has seen the number of units soar since the Vancouver tax.

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Home prices in Canada have jumped another $29,000 and have never risen faster

Real estate prices in Canada have never been higher or increased faster. The cost of a typical home reached $825,800 in January, up 3.69% ($29,400) from the previous month. Compared to the same month last year, prices are 28.01% higher ($180,700). Annual growth reached a new record high for benchmark prices. Remember, this is not just for one or two markets, but the price of a house across the country.

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Canadians are fleeing cities for small towns and eroding affordability: RBC

Canada’s largest bank dove into 2021 census data and found that “resort towns” had the fastest population growth. From 2016 to 2021, the top three growing markets are Squamish (21.8%), Wasaga Beach (20.3%) and Tillsonburg (17.3%). Small numbers are easier to grow, so high rates are not shocking. That’s still a mind-boggling amount if you think about it. Nearly one in five people in these three cities did not live in these areas five years ago.

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