May 13, 2024 | Happy Monday morning!

Happy Monday morning!

The labour market in Canada has weakened but hasn’t cracked, at least not yet. The economy added 90,000 jobs in the month of April, far surpassing all forecasts while also marking the largest employment increase in more than a year. What a pickle for the Bank of Canada.

Rate cut expectations continue to be pushed further out, as the underlying economic data just isn’t bad enough yet. This is unwelcoming news for Canadians living on the edge, struggling under higher debt loads, and hoping for rate cuts. Markets are now pricing in just a 45% probability of a rate cut from the BoC in June.

The longer it takes for a material drop in interest rates the more pain it will inflict on the housing industry. Remember just a few weeks ago we heard from Alan Frydenlund, a lawyer with Vancouver firm Owen Bird, which specializes in commercial foreclosures. Over his four-decade career, he says the past year or so in Vancouver has been busier in terms of big real estate insolvencies than any time since the early 1980s, including the 2007-08 financial crisis.

We had more anecdotes from developer, and popular blogger Brandon Donnelly this week.

There are times when the anecdotes diverge from the data. That is not the case today. Quarterly construction insolvencies are humming at their highest levels in a decade.

Housing units under construction will soon turn to housing completions, at which point it will be a game of musical chairs for jobs in the construction sector. Hopefully the BoC has the foresight to see this coming. The Canadian economy might not be in a recession yet, but it certainly is for the real estate sector.

Governments continue to throw money at the problem, billions actually, to keep the construction cycle from collapsing. They’re calling it the housing accelerator fund but it might soon be rebranded the housing declerator fund. “Higher for longer” is crushing the housing supply chain.

It’s also putting further strain on households. In aggregate, Canadians are shelling out 15 cents of every after-tax dollar on debt service. That is right at, or higher than, the punishing levels that presaged each of the past four recessions dating back to 1990.

According to the financial stability report released by the Bank of Canada this past week, financial pressure will increase most for households that took out a mortgage in 2021 and early 2022 when house prices were close to their peak and mortgage rates were very low.

Mortgage holders renewing next year will see a projected 25% increase in their monthly mortgage payments. That jumps to just over 30% for those renewing in 2026. This all assumes a modest decline in mortgage rates.

For those with fixed payment variable rate mortgages, the median renewal will see a 61% increase to their monthly payment come 2026. Remember some banks are allowing borrowers to defer interest outstanding and tack it onto the balance of the mortgage. In other words after 5 years of paying a mortgage it’s possible to see a scenario where the balance owing is actually larger.

Lower rates would paper over a lot of this mess, but we need more people to lose their job first, and according to Stats Can we’re not there yet. A rather unpleasant thing to wish for, isn’t it?

Perhaps we just need to recalibrate and work through the uncomfortable medicine that is higher for longer.

Steve Saretsky May 13th, 2024

Posted In: Steve Saretsky Blog

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