For Maclean’s eighth annual charting ploy, we have once again asked dozens of economists and analysts to reflect on the year ahead and choose a chart that will help shape Canada’s economy in 2022 and beyond, and explain this perspective with their own words.
This year, we’ve decided to post the charts for multiple days, making this more of a Charting Week than a one-day data binge. We also cover jobs and income, inflation, COVID, and energy.
How We Will Withstand Higher Interest Rates
Brett House, deputy chief economist; Y Farah omran, economist, Scotiabank Economics @BrettEHouse @Brothers_official
Canadian households and housing markets can weather the interest rate hikes that the Bank of Canada is expected to deliver next year. Currently, less than half of Canadian households have mortgages or Home Equity Lines of Credit (HELOC). About 75 percent of existing mortgages are locked at fixed rates, while the much smaller stock of HELOC balances has floating rates. Scotiabank Economy waiting holders of the most popular five-year mortgages that roll over in 2022 to see their rates rise by an average of 36 basis points (bps), which translate in about $ 50 a month in additional payments on the current average outstanding loan balance of $ 241K. Renewals in 2023 are forecast to see rate increases of about 45 bp, or about $ 65, in additional monthly payments. While no one wants to pay more for their mortgage, Canadian borrowers are prepared to absorb higher rates: according to the stress tests required by the federal government, they had to show that they could afford rates around 180 bp higher when they took out mortgages almost five years in directors.
The new mortgages contracted during 2021 have been subjected to stress tests against an even stricter standard: borrowers have had to demonstrate that they could handle an interest rate of 5.25 percent, approximately 250 basis points above the fixed rates at five years and about 380 basis points on the variable rates on offer. in December 2021. Although the share of variable rate mortgages in new origination skyrocketed in 2021, they still account for only about a quarter of all outstanding mortgage balances. On most variable rate terms, rising rates do not trigger immediate increases in monthly payments; on the other hand, amortizations are lengthened. When higher interest rates mean higher current debt service costs, mortgages can generally be converted to fixed-rate loans.
Canadians are ready to go back to normal interest rates.
Inflation is behind house price growth, far behind
Hilliard R. MacBeth, Portfolio Manager, MacBeth MacLeod Partners @hmacbee
Canada’s housing bubble has become a massive problem for the Canadian financial system. House prices are much higher here than in most other countries, and household debt levels incurred to keep up with the bubble are now a major risk.
One of the lesser known aspects of the bubble is its lack of upward pressure on inflation and the consumer price index, even as house prices have soared.
This graph shows that house prices in Toronto, Vancouver and nationally have grown between 4.25 and almost five times, with household debt keeping pace. That rate of increase is more than seven percent per year. However, the CPI measurement of housing costs known as “shelter” (shown in green with the arrow) has only advanced slightly, growing about 1.6 times. Most of the time that growth has been less than two percent per year.
You may be wondering how this happened, especially since “safe” is the largest weight component of the CPI. Statistics Canada uses a monthly payment approach to measure housing costs. The cost of buying a home is not included. A key part of the monthly cost of home ownership is the mortgage payment, which includes repayment of principal and interest. And interest rates have fallen steadily for the past two decades, keeping the housing price bubble alive but keeping the cost of housing at a lower profit.
The irony is that as the Bank of Canada increases interest rates, starting next year, house prices could fall, but the CPI measurement of housing costs will increase, as the interest rate has significant weight in the calculation.
Home construction will slow to a simmer in 2021; Will the business intensify?
Doug porter, Chief Economist, BMO Financial Group
Amid the many staggering economic statistics that emerged from the pandemic, this may be the most staggering: In the first three quarters of 2021, residential construction accounted for a larger share of Canadian GDP than business investment. That had never happened before, not even close. In the 50 years prior to the pandemic, business investment was typically about twice a proportion of the economy as housing; a “normal” year would see roughly 12 percent spent on private capital spending and 6 percent on residential construction. (Statistics Canada includes new home construction, renovation activity, and real estate agent fees on the latter.)
The crossover in 2021 speaks of (a) very weak business investment (tied with 1993 as the lowest on record) and (b) very strong real estate activity (a record share). Because all of these figures are expressed in nominal or current terms, crackling home prices played a role in the rise in real estate activity. But even in real or inflation-adjusted terms, the share of housing in activity would continue to rival that of the late 1980s as the strongest on record.
Looking ahead, housing is expected to simmer from the extremes of 2021, and was already declining since the fireworks earlier in the year. The biggest question mark for the Canadian economy is whether business investment can increase now; We suspect that it will, but we only expect a moderate recovery in the short term. Canada’s heavy reliance on housing does not appear to be ending anytime soon.
Fueling the home shopping spree
Stephen Punwasi, co-founder of Better Dwelling @StephenPunwasi
Much attention has been paid to the lack of housing inventory, but little attention to the real problem: excess demand. When the Bank of Canada (BoC) cuts rates and uses quantitative easing, they seek to stimulate demand to increase inflation. The tariff reduction mechanism pushes consumers forward to compete with existing buyers. Greater competition for the same batch of goods means more inflation.
That is what is happening with real estate. From April 2020 to October 2021, Canada posted around 246,500 home sales in excess above trend. By contrast, new listings were higher, but only 85,800 homes above trend, much lower than the increase in home sales.
Separately, BMO estimates the annualized dollar value of excess home sales to be around $ 150 billion. This is the equivalent of six percent of Canada’s GDP. That’s not total sales, it’s just the excess above trend, spurred by cheap credit. Note that this is happening with virtually no population growth.
The BoC spurred demand to boost home sales and inflation, and now it’s pretending to have no idea where it came from. Wow, what a mystery.
Single-family homes are becoming prized assets
Ben rabidoux, founder, North Cove Advisors @BenRabidoux
The number of single-family homes listed for sale in major metropolitan areas across the country has plummeted in recent years. In the greater Toronto area, listings are down 52 percent from last year and down a surprising 77 percent from 2017 levels. In Vancouver, it’s a similar story, with inventory declining by almost a third compared to last year and by more than half since 2018.
While excess demand and speculation are undoubtedly contributing factors, the main driver appears to be a deficit in new construction in the last decade at a time when population growth was exceptionally strong. From the 1970s to the 2000s, population growth averaged about 3.1 million per decade, while new single-family home completions averaged just under 1.3 million. But in the 10 years from 2010 to 2019, population growth increased to four million, while new terminations fell to less than 1.1 million.
Until Canada figures out how to correct this imbalance, we can expect single-family homes to be sought-after assets in major markets across the country.
Reference-www.macleans.ca