The Weekly 411

TLDR:

🏘 New Report: Canada's Real Estate Market Surpasses Other G7 Countries

📈 Mortgage Rates Rise Further as Bond Yields Surge

🧐 Economists Suggest Canada is Already in a Recession

🧾️ Toronto's New Foreign Buyer Tax

🏘 New Report: Canada's Real Estate Market Surpasses Other G7 Countries

• New data from the US Federal Reserve Bank highlights the severity of Canada's real estate surge compared to other G7 countries.

• Canada's real estate growth surpasses the peaks seen historically in the US and Japan

• Canada's real estate prices have grown significantly, with a gain of 206.8% since 2005, surpassing gains in the United States (88.1%), UK (83.7%), Germany (74.8%), and France (53.7%).

• Since the peak in Q1 2022, the price of the average Canadian home has only dropped by 16.1%

Why This Matters: The comparison of Canada's real estate bubble to other G7 countries highlights the ongoing concerns about the fed-backed, speculative credit bubble.

However, Canada's population has been boosted as a result of recent policy decisions, which also support the rise in prices. 

📈 Mortgage Rates May Rise Further as Bond Yields Surge

• Government of Canada (GoC) 5-year bond yields, which impact the cost of 5-year fixed-rate mortgages, have been rising sharply.

• Bond yields had previously fallen due to cooling inflation and rate-cut expectations, leading to lower mortgage costs

• The GoC 5-year bond yield has reversed course, rising significantly over a short period due to accelerated inflation in Q4 2023.

Why This Matters: Mortgage rates were believed to have peaked and were expected to begin dropping, but the recent surge in bond yields is likely to prevent rates from falling in the near term. Although it is not yet clear if this trend will continue.

🧐 Economists Suggest Canada is Already in a Recession

• Economists from Oxford Economics believe that Canada is already in a recession, contrary to the Bank of Canada's prediction of a soft landing.

• Oxford predicts a decline in GDP of 1.1% and an additional 5-10% drop in home prices by mid-2024.

• Labor supply is forecasted to outpace job growth and drive the unemployment rate to 7.5% by Q3 2024.

• Analysts expect inflation to fall to 2% by the end of this year and believe the bank will gradually cut its benchmark interest rate, ending the year at 4.25%.

Why This Matters: Home prices are expected to decline further, however external factors such as wildfires, extreme weather, labor strikes, and supply disruptions could be wildcards in 2024. Additionally, global factors such as slowing growth in the US and rising tensions and conflicts add risk and uncertainty to Canada's economic outlook.

🧾️ Toronto's New Foreign Buyer Tax

• Toronto is considering implementing a new foreign buyer tax to discourage foreign home purchases

• The proposed Municipal Non-Resident Speculation Tax (MNRST) would be set at 10% and could go into effect in 2025

• The new tax is contingent on the federal government lifting the current two-year foreign buyer ban by 2025.

• Ontario already has a foreign buyer tax (NRST), which has collected over $1B in revenue from 2017 to 2022, with roughly half of that attributed to home purchases in Toronto. 

Why This Matters: It's unclear whether the current two-year ban on foreign buyers will be lifted by 2025. 

Critics argue that the ban had several exemptions and was more of a political move than an effective solution to the housing affordability issue. Exemptions to the foreign buyer ban, such as for students and first-time buyers, have watered down its impact.