Happy Monday folks! It is officially week #9 of the Coachman’s report and to kick off our third month of the newsletter, we thought we would bring you something a little different! Since you enjoyed our last couple of special reports, we thought we’d bring you another one today on the North American housing market! So read on for some in-depth analysis of where we think this foundational component of the economy is headed.
“If you have a garden and a library, you have everything you need."
- Marcus Tullius Cicero
Special Report: NA Housing
The Canadian housing market has seen a near-continuous bull market for the past 35 years, with housing prices kept to individual localities, such as Calgary after the oil price collapse in 2015. Even during the 2008 financial crisis, prices dropped only slightly and recovered by 2009.
Canadian housing price index from May 2005 to May 2021
This bull market has left many Canadians unable to afford the homes that their parents were able to purchase, and priced the majority of the population out of the cities which they once called home. As we can see below, the average price of a detached home has increased by over 400% since 1997.
Another major metropolis facing the same issue, to an even more pronounced degree, is Vancouver. As shown below we can see that the average home price has skyrocketed up over 35% since the pandemic began.
The housing bubble has become a major national issue within Canada. During the previous federal election, held last year, each of the three major candidates had a plan to block foreign buyers, and make home building a priority. Although, these measures may not be as necessary as they once were due to the ongoing decline in prices in areas outside of major cities. An often ignored result of this decline, many Canadians who purchased a property in the last 12 months will be left with negative equity in their properties. For those who are unaware of the concept of negative equity, here’s a breakdown. Let's say you buy property A, the property is valued at $1.2M, with a standard down payment of $240k. For arguments sake let’s also say that you bought this property during last year's peak. If the value of your home drops by 25%, leaving it at a value of $900k, you’re now stuck paying a mortgage at the price of the initial loan, while also having a value of -$60k in the home. This will leave many investors stuck, as they’re unable to sell their home for a profit, owing the bank money if they do sell, and if invested into a variable rate mortgage they’ll see monthly payments rise. Moreover, those who purchased properties in “second-tier” cities located outside of metropolises such as Toronto are going to experience more pain as the return to office becomes more commonplace, and the appeal of living 45 minutes outside of the city dwindles.
The US housing market has seen similar levels of insanity over the years. As shown below the median home price has nearly quadrupled over a 29-year period, nearly a double if you adjust for inflation. After prices recovered from their 2006 highs in 2019, they once again exploded as the pandemic response slashed interest rates, and flooded the economy with cheap money.
As a result of these measures, inflation is forcing many Americans to spend more on basic essentials, and as such, they may be priced out of their homes. Frankly stated, it’s quite likely that the majority of the market didn’t price in the current inflation trends eating up their disposable income let alone the steep rate hikes that have occurred recently. We will have to see where the trends lie on Friday as the CPI report is released, to see if further rate hikes are warranted. Another trap for the US housing market will be the layoffs seen in the tech sector. With multiple companies instituting hiring freezes, or layoffs, the laptop class will likely shrink. Say what you will about the importance of their work, or lack thereof, the discretionary income spent by these workers does fuel large swaths of the American economy. And while these layoffs won't initially affect the daily workings of the country, the removal of their disposable income will pour some water onto the hot fire that is the current housing market. Another interesting facet of the US real estate market is the massive chunk owned by corporations. As we all remember during the pandemic headline after headline described how companies such as Blackrock and Zillow were buying up every piece of inventory they could get their hands on, even offering 10-20% above asking. And while yes they were able to finance these portfolios at some of the lowest interest rates in recorded history, the ongoing decline in asset prices will diminish the value of these companies for the foreseeable future. This begs the question, will these companies hold on to these homes to see a profit in the decades to come, or will they balk and begin offloading en masse, furthering the housing market decline.
Another interesting facet of the current US financial health for the technically inclined, is this chart breaking down the bankruptcies in the United States. As we can see, they’re primed for a bullish move upwards, signalling that more pain could be seen across the board in the land of the free.
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