Déjà vu

Well, cross that one off the list.

“There will be no default,” Joe Biden said. No Republican jumped up to dis him, suggesting the debt ceiling thingy is now solved. House Speaker Kevin McCarthy said that if he, “were in the market, I wouldn’t be concerned.” So, don’t you be.

This is significant news suggesting the world (as we know it) won’t actually end next Thursday. America will keep on borrowing money and paying interest on past debts. Government programs will stay funded, which is good since federal spending equals 10% of the entire GDP. And, of course, equities won’t crash by 40% nor will interest rates go ape or the bond market have a cow.

We told you this would happen.

But we’re not out of the rate woods yet. This week the yield on Government of Canada 5-year bonds swelled like a lovesick sponge, zipping past the 3.5% mark, before retreating a little on the US news. Last month the thing sat at less than 2.8%. It’s a reason why five-year mortgages took an unpleasant turn higher in the last few days, and there may be more to come.

Our CB is set to pivot on June 7th, abandoning its ‘pause’ status, hiking the benchmark rate a quarter point. At least that’s the call by Scotia’s chief economist, Derek Holt (who was savaged in this very blog’s comment section a few days ago). Holt (and others) think inflation is too sticky to ignore and now being fueled by the gaseous housing market.

All this happens against a backdrop of unrelenting household debt. This week we brought you the embarrassing news our citizens owe proportionately more than Americans. Or Brits. Even the hedonistic Italians and indolent French. Our CB is worried. CMHC says we’re cruising for trouble if the economy chokes. And yet we keep on borrowing. If you’re 32 with a kid on the way, you couldn’t care less what the federal housing agency or central bank says. You buy, especially if you’ve been on the sidelines for a year waiting to see if real estate would crash.

It didn’t. You can wait no longer.

The latest evidence is irrefutable. Look at the country’s biggest housing market, where almost 70% of all sales are now “over ask.” And, no, this is not the result of realtors falsely pricing properties to get a bidding war. Prices, actually, are quickly regaining Peak House (Feb of ’22) status.

It’s astonishing, Makes you wonder where the dough is coming from.

Almost 70% of GTA sales now for more than asking

Source: Scott Ingram. Click to enlarge.

There are reasons this will continue. But before anyone below decks accuses me of being a property bull, know this: the blog will never lie to you about current conditions or trash talk markets just because they’re moving in the wrong direction. But informing you of why things are occurring does not diminish the risk of Canadian real estate imploding in an eruption of unrepayable debt some time in the future. So, buy a house if you need one and can afford it, but accept this may end badly.

In the next few months, however, we’re likely to set new price records. Inventory is at historic low levels and not improving fast enough to meet demand. People don’t want to sell if it means giving up cheap mortgages. Or they can’t sell if they have VRMs with 52-year amortizations. Taxes and commissions are crazy, making many think twice about listing. And if someone does cash out of a big house with a profit, finding a new place to live when so few properties are available is dire.

What about all those new houses politicians at all levels promised?

Fuhgeddaboudit. Housing starts in 2022 were lower than in 2021 and are heading even lower this year. In Ontario completions are running at just 44% of the provincial target. In Toronto alone ten thousand condo units were cancelled because buyers stopped buying precons. And we should all understand that while a small number of “affordable” units will be built for those in the lower income strata, none of the new singles, semis, towns or condos being pumped out by developers will be cheaper.

Why would they be? Materials cost the same (or more). Land costs a ton to service. Wages are going up for the trades. Taxes are on the rise. This is a world in which slapbang Mattamy Homes OSB & face brick McMansions in soulless places like Brampton and Milton can cost $2 million the day you sign the order. Prompting the company to accelerate its building program is not doing to bring them down to $1.5 million in two years. The middle class if on its own.

Low inventory. Lagging new supply. Rising costs and escalating taxes. Increased demand from buyer incentives like the FHSA. Lenders and governments unwilling to let higher rates weed out over-extended households. A population bulge now in peak nesting years.

How does anyone think this mess will result in cheaper homes? That is, until it all blows up.

About the picture: “My husband and I are long time millennial readers,” writes Abby. “Your blog has helped us out immensely over the last 9 years, especially concerning investing in our TFSAs, RESPs and our son’s RDSP. We have 4 sons under the age of 8 and recently (finally) got our first puppy. Here is Piper, a 12 week-old standard golden doodle puppy. She is loveable, always wants to please and be with us. The baby is unsure about all the attention Piper gets but calls her “good girl” (he thinks that’s her name). Hope you and Dorothy have a wonderful weekend!”

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