Five graphs defining Canadian real estate and housing in 2022

Sest Maclean’s in the eighth annual leaderboard, we have once again asked dozens of economists and analysts to reflect on the coming year and choose one chart to help shape Canada’s economy in 2022 and beyond, and to explain this outlook in our own words.

This year, we’ve decided to publish the leaderboards for several days, making it more chart-weekly than daily. We also look at jobs and income, inflation, COVID and energy.

How we tolerate higher interest rates

Bretti House, Deputy Chief Economist; and Farah Omran, Economist, Scotiabank Economics @BrettEHouse @Brothers_Official

Canadian households and housing markets may be able to withstand the rise in interest rates expected by the Bank of Canada next year. At present, less than half of Canadian households have mortgages or home equity lines of credit (HELOCs). About 75 percent of existing mortgages have a fixed interest rate, while a much smaller HELOC balance has a floating interest rate. Scotiabank Economics expects interest rates on the most popular five-year mortgage holders to be renewed in 2022 to rise by an average of 36 basis points (bps), an additional monthly payment of around $ 50 on the current average outstanding balance. $ 241,000. In 2023, additional monthly payments are projected to be renewed by about 45 basis points, or about $ 65. Although no one wants to pay more on their mortgages, Canadian borrowers have to use higher interest rates: under federally mandated stress tests, they had to show that they could handle about 180 basis points higher interest rates than they did on larger loans almost five years ago. directors.

New mortgages taken in 2021 have been tested to even stricter standards: borrowers have had to show that they can handle a 5.25 per cent interest rate, a five-year fixed interest rate of around 250 basis points and a variable interest rate of around 380 basis points. December 2021. Although the share of floating rate mortgages in new loans increased sharply in 2021, they still account for only about a quarter of all outstanding mortgage balances. Under most variable rate terms, rising interest rates do not cause an immediate increase in monthly payments; depreciation is extended instead. When higher interest rates mean higher current debt service costs, mortgages can generally be converted into fixed-rate loans.

Canadians are ready to return to normal interest rates.

Inflation is lagging behind the rise in house prices

Hilliard R. MacBeth, Portfolio Manager, MacBeth MacLeod Partners @hmacbee

The Canadian housing bubble has grown into a huge problem for the Canadian financial system. Housing prices are much higher here than in most other countries, and the level of household debt to keep pace with the bubble is now at high risk.

One of the lesser-known aspects of the bubble is its lack of pressure on inflation and the consumer price index, even as house prices have soared.

This chart shows that house prices in Toronto, Vancouver and nationwide have risen about 4.25 to almost five times, while household debt has remained stable. This growth rate is over seven percent per year. However, the measurement of the consumer price index for housing costs, known as a shelter (green with an arrow), has advanced by only one centimeter, increasing by about 1.6 times. In most cases, this growth has been less than two percent a year.

You may ask how this happened, especially since “shelter” is the largest weighting component of the consumer price index. Statistics Canada uses the monthly payment method to measure the cost of housing. The cost of buying a home is not included in the price. The major part of the monthly cost of the acquired dwelling is the mortgage payment, which consists of the repayment of the principal and interest. And interest rates have fallen steadily over the past two decades, keeping the housing bubble alive but keeping shelter costs lower.

The irony is that as the Bank of Canada raises interest rates, house prices could fall next year, but the measurement of the CPI for housing costs is rising because the interest rate is an important factor in the calculation.

Housing construction will subside in 2021; will the business pick up?

Doug Porter, Chief Economist of BMO Financial Group

Among the many shocking economic statistics from the pandemic, this may be the most shocking: in the first three quarters of 2021, housing accounted for more of Canada’s GDP than business investment. This has never happened before, not even close. In the 50 years before the pandemic, business investment typically accounted for about twice as much of the economy as housing – in a “normal” year, about 12 percent would be spent on private capital and six percent on housing. (Statistics Canada includes fees for the construction, renovation and real estate of new homes.)

The crossover in 2021 is about both (a) very weak business investment (at a record low in 1993) and (b) very strong housing activity (a record high). As all these figures are in current or nominal terms, crisp home prices played a role in housing growth. But even in a real or inflation-adjusted situation, the share of housing would compete at a record high in the late 1980s.

Looking to the future, housing is expected to fall from the extremes of 2021 and was already easing after the fireworks at the beginning of the year. The biggest question for the Canadian economy is whether business investment can now pick up – we suspect it will grow, but we expect only a moderate recovery in the near future. Canada’s heavy dependence on housing does not appear to end any time soon.

Boosting home shopping

Stephen Punwasi, Co-founder of Better Dwelling @StephenPunwasi

Much has been focused on the lack of housing stock, but little on the real problem of excessive demand. If the Bank of Canada (BoC) lowers interest rates and uses quantitative easing, they want to stimulate demand to boost inflation. The mechanism for lowering interest rates drives consumers to compete with existing buyers. More competition for the same batch of goods means higher inflation.

This is what happens to real estate. Between April 2020 and October 2021, there were approximately 246,500 home sales in Canada that exceeded the trend. In contrast, new listings were higher, but only 85,800 homes out of trend – much less than home sales growth.

Separately, BMO estimates the annual dollar value of excess home sales to be approximately $ 150 billion. This equates to about six percent of Canada’s GDP. It’s not total sales, it’s just redundant over a trend stimulated by cheap credit. Remember that this is practically without population growth.

BoC stimulated demand to boost domestic sales and inflation, and now it looks like it has no idea where it came from. Golly gee whiz, what a mystery.

Single-family homes are becoming a valuable commodity

Ben Rabidoux, Founder of North Cove Advisors @BenRabidoux

The number of single-family homes sold in major metropolitan areas across the country has fallen sharply in recent years. In the Greater Toronto Area, quotations have fallen 52 percent from a year earlier and 77 percent from 2017 levels. In Vancouver, this is a similar story, where stocks fell by almost a third year-on-year and by more than half from 2018.

While excessive demand and speculation are undoubtedly factors in this decline, the main driver seems to be the lack of new construction over the last decade, at a time of extremely rapid population growth. From the 1970s to the 2000s, population growth averaged about 3.1 million over the decade, while the construction of new single-family homes averaged just under 1.3 million. However, in the 10 years 2010-2019, the population grew to four million, while the number of new graduates fell below 1.1 million.

Until Canada understands how to correct this imbalance, we can assume that single-family homes are a coveted asset in key markets across the country.

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