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Commentary 2

Volume 25, Issue 25
June 21, 2021.
June 18
June 11
Net Weekly
Change %
DJIA 33,290.08 34,479.60 -1,189.52 -3.45%
Nasdaq 14,030.38 14,069.42 -39.04 -0.28%
S&P 500 4,166.38 4,247.44 -80.99 -1.91%
S&P/TSX Index 19,999.59 20,138.35 -138.76 -0.69%
Source: Globe & Mail

The 'Core' of the Housing Problem
Robert Kavcic,
BMO Senior Economist

Word surfaced this week that one particular company is going to buy up to $1 billion worth of single-detached houses in Canada over the next five years, targeting mid[1]sized cities, and convert them into rental units. This might seem to be a pretty standard concept, but judging by the national media backlash over the plan, it struck a very sensitive nerve. To be sure, we’re not here to pick sides, but simply to help understand what is behind the issue.

On one hand, investor ownership of Canadian real estate is not new, even by large corporations and real estate investment trusts. StatsCan data, for example, show that investors own roughly a third of the condo market in Canada’s largest cities. Aside from a brief period where nonresident investment was rising quickly, this has rarely been an issue. There is also a perpetual call for more rental stock in Canada, especially in the underserved single-detached market. One issue is that the move doesn’t create new supply, but further bids up the price for an already extremely scarce resource (detached homes) in the major cities and, more recently, smaller mid[1]sized cities. At an emotional level, it is a young family versus big corporate money.

Understanding all sides of the argument, the noise around this is the culmination of more than a decade of supply- and demand-side forces that, almost by design, predictably got us to where we are today. When Ontario introduced the Places to Grow Act in 2005, it set off down a long road toward single-detached home scarcity around Canada’s biggest market. To quote, “the Plan’s emphasis on optimizing the use of the existing urban land supply represents an intensification first approach to development and city building”. Through the 1990s and early-2000s, housing starts for single- and multi-unit properties ran roughly in line with each other in the Toronto CMA. But, by 2019, while multi-unit starts totaled almost 30,000 units, there were just over 4,000 single-detached homes started. Indeed, with most municipalities targeting intensification rates in the 40%-to-60% range, splitting lots, building out brownfield areas and converting singles to multis, is right in-line with development policy.

The problem is that these measures are seriously holding back the supply curve for single-detached houses, and making it steeper, while the demand curve for those same houses is shifting out dramatically. Again, this has been entirely predictable given prevailing demographics in this country. Specifically, the leading edge of the millennial cohort is now about 40 years old, and there is a distinct bulge in Canada’s population pyramid in the 25-to-39 age group. This group is almost 8 million large, and has been growing faster than 2% per year, the strongest since the late-1980s. These are prime home-buying years, and prime family-building years. The thing is, the idea that families want to live in dense, smaller and walkable urban spaces, is a bit of a fairy tale. Young families want space, and they need it at a time before the baby boomers are ready to move on from those coveted properties, and after 15 years of crowding out single-detached development. The exodus to smaller markets during the pandemic is a good example of the pressure finding a relief valve, and that now might be competing with institutional dollars.

Bottom Line: Fundamentally, the core of our ‘housing problem’ is a major mismatch between the type of supply and demand, but it has been an entirely predictable outcome based on development policy and demographics. This imbalance should be cresting in the next few years, but the pandemic (pulling forward some activity), immigration targets north of 400k people per year, and record-low interest rates have magnified it.

Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada
The TSX was in the middle of the pack down -0.7% last week. Every TSX sector was down with the exceptions of tech (+13.4%) and utilities (flat). Materials (-7.8%) and health care (-7.4%) were the laggards. Year-to-date, every sector is higher except materials (-2.2%), while energy continues to lead the way up 32.3% despite losing 2.3% last week. The loonie was clobbered last week, losing 2.5%, the steepest weekly decline since March 2020. A more hawkish Fed lifted the US$, while commodity prices were hammered, weighing heavily on the C$. However, oil hung in there closing above $71, up just under $1 on the week, suggesting the loonie’s struggles may be short-lived. The C$ is modestly firmer to start the week, with oil creeping higher as well. In the bond market, it was a wild week in fixed income with the Fed’s hawkishness hammering the belly of the curve and driving stop outs in steepeners. The long end rallied hard, ending the week 13.5 bps richer at 1.80%, the lowest since early March. 10s were little changed despite rising as much as 7 bps at one point, while 2s and 5s cheapened 13 & 14 bps, respectively. That left 2-year yields at the highest level since April 2020.

YTD, the TSX is up 14.72% and the benchmark 10-year yield ended the week to yield 1.38%.
Stocks declined as a surprisingly hawkish outcome from the Federal Reserve’s June 15–16 policy meeting and late-week comments from a Fed official about potentially earlier-than-expected rate hikes dragged the Dow Jones Industrial Average lower. The Dow includes many cyclical companies—those most reliant on economic growth. On the other hand, the tech-heavy Nasdaq Composite index posted a much more modest loss. The broad market S&P 500 Index declined. The early part of the week was relatively quiet on subdued trading volumes as investors looked forward to the end of the Fed policy meeting on Wednesday. The Fed’s post-meeting statement and Chair Jerome Powell’s press conference were widely viewed as surprisingly hawkish. Policymakers acknowledged that progress on vaccinations has allowed the economic recovery from the pandemic to gain strength, and Powell acknowledged that Fed officials have begun to discuss slowing the central bank’s bond purchases, the first step toward eventually raising interest rates. Powell said that observers could characterize the meeting as “talking about talking about tapering.”  U.S. Treasuries were volatile following the Fed policy meeting. The 10-year U.S. Treasury yield increased sharply after the Fed meeting on Wednesday before falling on Thursday and Friday. (Bond prices and yields move in opposite directions.) Short- and intermediate-term Treasury yields experienced more sustained increases. The difference in yield on five- and 30-year Treasuries reached a lower level than where it started 2021, a trend that could weigh on financial stocks because banks tend to profit from larger spreads between short- and long-term rates.

YTD, the S&P 500 is up 10.93%, the Dow Jones Industrials are up 8.77%, and the Nasdaq is up 8.86%. The yield on the 10 year Treasury closed at 1.45%.

Source: BMO Capital Markets 

The Good: Housing Starts +3.2% to 275,916 a.r. (May); MLS Home Prices +24.4% y/y (May) ;New Housing Prices +11.3% y/y (May); Global investors bought a net $10.0 bln in Canadian securities (Apr.); New Motor Vehicle Sales +250.9% y/y (Apr.) —base effects.

The Bad: Consumer Prices +3.6% y/y (May)—fastest since 2011 Industrial Product Prices +3.1% (May); Wholesale Trade Volumes -0.2% (Apr.); Manufacturing Sales Volumes -3.3% (Apr.); Manufacturing New Orders -2.5% (Apr.); Existing Home Sales -7.4% (May)—but from extreme levels Mortgage Credit +7.7% y/y (Apr.)—fastest since 2010.


The Good:  Industrial Production +0.8% (May)—and Capacity Utilization Rate +0.6 ppts to 75.2% Housing Starts +3.6% to 1.572 mln a.r. (May); Leading Indicator +1.3% (May); Global investors bought a net $93.2 bln in U.S. securities (Apr.).

The Bad:  Retail Sales -1.3% (May)—but prior two months revised up Producer Prices +0.8%; Import Prices +1.1% (May) ; Building Permits -3.0% to 1.681 mln a.r. (May); NAHB Housing Market Index -2 pts to 81 (June); Empire State Manufacturing Survey -3.3 pts to 57.0; Philly Fed Index -0.2 pts to 62.5 (June) —both ISM-adjusted Initial Jobless Claims +37k to 412k (June 12 wk).

Virtual real estate plot sells for close to $1 million

LONDON — A patch of virtual land in the blockchain-based online world Decentraland sold for more than $900,000 on Thursday, in a record purchase for the platform, the Decentraland Foundation said.

In Decentraland, ownership of virtual land is bought and sold in the form of non-fungible tokens (NFTs). An NFT is a kind of crypto asset which records the ownership status of digital items on blockchain.

The buyer was an investment vehicle called Republic Realm, a digital real estate investment fund, the Decentraland Foundation said. Republic Realm is owned by Republic, a U.S.-based investment platform backed by investors including Binance and Prosus.

It was the most expensive purchase of NFT land to date, according to DappRadar, a website which tracks NFT sales data. Made up of 259 units or “parcels” of land, the plot of virtual real estate represents 66,304 virtual square meters (16 virtual acres), making it also the biggest Decentraland land purchase in terms of virtual size.

The purchase was made using MANA, Decentraland’s own cryptocurrency. The land cost 1,295,000 MANA, which was worth $913,228.2 at the time of sale.

Blockchain-based real estate in virtual worlds has surged in price as part of the NFT market frenzy which began in early 2021. In virtual worlds such as Decentraland, people can display their NFT art collections, walk around with friends, visit buildings and attend events.

As part of a recent Sotheby’s NFT sale, the auction house opened a virtual replica of its London building within Decentraland and exhibited the NFT artworks there, attracting more than 3,000 virtual visitors.

In another blockchain-based virtual world, The Sandbox, a patch of virtual real estate sold for around $650,000 earlier this month, the site’s co-founder Sebastien Borget said.

Meanwhile in Somnium Space, an estate which fetched $500,000 in March is still the record high, Somnium Space’s founder and Chief Executive Artur Sychov said.