Canada vs US…
Falk Hampel
Canada vs US…where are we headed?
Let’s look at the all-important housing market. In Canada the housing market is in recessionary territory, and it’s going to get worse before it gets better.
Home sales which peaked in 2021 at just over 650,000, are now down significantly and activity will deteriorate further into the first half of 2024, as interest rates remain elevated for now. About 60,000 real estate agents have left the industry in Canada in the first half of 2023.
Home prices are only down 11% from the 2022 peak and are still 38 per cent above pre-pandemic levels. The lack of new listings has kept these prices up, but that is changing as well. New listings have been climbing in recent months, which in part reflects increased distress sales, as owners list their properties due to financing issues.
That dynamic usually has housing headed for a buyer’s market, but there is the problem of increased cost through higher interest rates.
Home sales could fall another 10%-15% by the end of the first quarter of 2024 and probably won’t rebound to pre-pandemic levels until early to mid-2025.
Higher bond yields will cause fixed-mortgage rates to rise, shutting more buyers out of the market. The buyers who remain will have more bargaining power to negotiate lower prices.
The government has recognized the problem and is trying to implement relief to financially strapped mortgage borrowers through a new charter. But this charter has questionable aspects to it and could cause unintended consequences in a housing market that needs a correction.
A recent published report looked at data on home prices and median earnings for Canadian households. It found that a Canadian family earning the median household income of $79,876 (Ontario is around $100,000) can reasonably afford a $315,000 home. However, the average home price in Canada is currently $757,600. The housing market in Canada varies of course by region. Edmonton tops large cities with reasonable house prices while Toronto and Vancouver are at the bottom of that list. Newfoundland tops the list as the most affordable region, looking at income and house prices.
Several of these housing market issues will have a negative impact on an already struggling Canadian economy that could see energy as the only bright spot. The Bank of Canada will most likely lower interest rates halfway through next year and again by the end of 2024 to stimulate the economy, and then if necessary again in 2025, which is also an election year for Canada.
What about the US?
Like Canada, economic growth will probably continue to decelerate and ultimately result in a recession, followed by a return to growth in 2025. Unlike in Canada, the recession in the US could be very mild and the US economy is looking much stronger than ours.
The impact of higher interest rates will likely be much less south of the border. Today, nearly 95 percent of existing U.S. mortgages have fixed interest rates; of those, more than three-quarters are for 30-year terms. In Canada, a large percentage of all mortgages are variable, most of them obtained in January 2022, when some of them were available with a 0.99% interest rate. These variable rate mortgages are now putting more strain on the borrower and the lender. The overall Canadian economy will feel that impact all the way through next year and into 2025.
Then there is household debt. Canadians have gone opposite direction than the US after 2008. Household debt in Canada has been on the rise. In 2008, it stood at about 80% of the size of the economy, in 2010 it rose to 95%, and by 2021 debt exceeded 100% of GDP. By contrast, household debt in the US fell from 100% of GDP in 2008 to about 75% in 2021.
What does it mean for financial markets?
2024 is an election year for the US and these are usually positive periods in the market, no matter who is running and who is winning. Markets are always ahead of economies by about 6 months, meaning that some of the looming recession is already priced in. Times of pain are always times of opportunity. An overall slowing of the global economy will create volatility within the markets and present these opportunities.
Besides Japan and India, the US will most likely be one of the few areas for growth in 2024, especially during the second half of 2024 when the US central bank (FED) could start lowering interest rates. Canada will have a rougher go next year, but recover in 2025.
Falk Hampel
1315 Michigan Ave Suite E, Sarnia, ON, Canada
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