A new report out of the University of British Columbia says millennials – who make up the bulk of the highly coveted first-time buyer cohort – are still wildly priced out of the housing market.

The report, titled “Straddling the Gap”, says 25 to 34 year-olds are stuck between high home prices, rising rents, stagnant wage growth and the threat of rising interest rates.  It says that – over the next decade, on a national basis – average home prices would have to drop by more than $220,000 (about half their current value), OR wages would have to increase by more than $93,000 a year (about double their current level) in order for housing to be affordable.

In a hot market, like Vancouver, prices would need to drop by about 75%, OR wages would need to increase by about 400%.

Over the past 40 years the home-price-to-income ratio has risen from about 4 to 1, to more than 10 to 1.  Millennials are facing 13 years of saving in order to accumulate a 20% down payment, according to the report.  Their parents and grandparents typically had to save for just four years.

The UBC report comes as the City of Montreal is finalizing a proposed by-law that, the mayor says, will address affordability concerns.  The Montreal market has been picking up steam.  According to CMHC, sales are outpacing new listings and there is evidence of overheating.

Montreal mayor Valérie Plante is worried rising prices are forcing people off the island and into the suburbs.  A recent study shows 24,000 people left Montreal for outlying neighbourhoods between July 2017 and July 2018.

Montreal’s new by-law would force developers to set aside as much as 20% of new units for affordable housing, social housing or family-sized units.  The law is set to take effect 2021.

Jun 17, 2019
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First National Financial LP

I love this guy…always an excellent straight-in-the eyes viewpoint on the Canadian Mortgage Market. Worth a read…especially if you’re in the biz!

It’s been many moons since my last post and I have definitely fallen out of the habit.  Today’s note is the result of relentless harassment by the mean girls in marketing and the fact that Friday’s double employment reports gives me something specific to talk about.

Employment

The Canadian employment report ain’t pretty, she just looks that way.  The headline number indicates a solid increase of 27,700 full time jobs compared to survey expectations of 5,000 and the unemployment rate fell from 5.7% to a 45 year low of 5.4%.  Unfortunately, the details are less impressive.  Self-employment jumped by 61,000 leaving declines of 13,000 and 21,000 jobs in the public and private sectors respectively.  The jobless rate decline was also wearing a little lipstick in the form of a two-tick drop in the participation rate.  Finally, the hours worked actually fell 0.3%.  Overall, I rate last Friday’s job report as a solid “meh”.

Meanwhile, down in ‘Merica, nonfarm payrolls rose by 75,000 jobs.  That’s well short of the 175,000 expected.  In addition, the prior two months were adjusted down by a combined 75,000.  Probably not a disaster considering an unemployment rate of just 3.6% but this could be worrisome if this is the beginning of a trend as employers start pumping the brakes on hiring as uncertainty related to trade tensions persist.

Monetary Policy

It’s unlikely the Fed will react to one payroll report but given the backdrop of a potential trade war and low inflation it won’t take much more to trigger a rate cut.  The Fed next meets on June 19^th and the probability of a cut stands at 30%.  Perhaps more telling is that the probability of at least one cut by the September 18^thmeeting is almost 100%.

The Bank of Canada has its next meeting on July 10^thand the probability of a cut from the current overnight rate of 1.75% is just 10%.

Rates

5 year Government of Canada bonds are at a two year low of 1.30%.  For context, they were trading as high as 2.50% in November last year.  Before you start thinking we can’t possibly go lower from here, don’t forget that we spent most of 2015 and 2016 below 1.00% and bounced of 0.50% a couple of times.

10 year Government of Canada bonds are also touching two year lows at 1.45% after trading as high as 2.60% in November.  Back in 2016 they actually dipped just below 1.00% on a couple of occasions.

By comparison, US Treasuries are currently trading at 1.82% and 2.07% for 5 and 10 year terms respectively.

Securitization

In residential mortgage securitization news, Merrill Lynch Canada launched at $780 million NHA MBS offering literally minutes ago.  This is Merrill’s first syndicated offering since December 2017.  A general lack of new MBS supply should help this deal fly off the shelf.  They must be confident…bringing a deal of that size on the first warm and sunny Friday of the season wouldn’t be my first choice.

The statistics tell us that the national average price of a home is falling in Canada.  Despite that, housing affordability is still a significant challenge for buyers, especially in the country’s bigger markets.

Affordability to remain a challenge

The latest report from one of the big banks projects prices will rise in all six of Canada’s major metropolitan areas this year.  The increases – on top of already inflated prices and coupled with rising interest rates – are expected to have the cost of ownership outpacing (what has been until recently) stagnant wage growth.

Drive ‘til you qualify

These upward cost pressures suggest the trend known as “drive until you qualify” is likely to continue – if not increase – especially in the regions around Vancouver, Toronto, Montreal and Ottawa.  But the idea of leaving town to save money on the cost of a home is not without its drawbacks.

Moving out of the city almost always requires commuting back into town for work, school or other activities.  Late last year Canada Mortgage and Housing Corporation released a report that examines the trade-off between location costs and commuting costs.

Unfortunately the study was confined to the Greater Toronto Area, which is probably the most extreme case in the country.  However the methodology can be applied to any metropolitan area and the findings are likely to be proportional, with the costs and drawbacks being relative to the commuting situation in any local market.

Commuting can drive away your savings

What the CMHC report found is that, in many instances, commuting costs can completely offset the savings of moving to a more affordable location.  Not surprisingly the report finds that commuting costs rise as the distance from the urban centre increases.  This negative relationship is well known and was first formalized by a German economist in the 19^th century.  In several cases the CMHC research found that when the carrying costs of the lower priced suburban or exurban home were combined with commuting costs the amount matched or even exceeded the cost of buying in the city.

Your time is worth something

On a somewhat more abstract level there is also the consideration of what a person’s time is worth to them.  In a separate study, based on the 2016 census, Statistics Canada found that commutes of an hour or more each way are becoming more common.

Nearly 60% of these so-called “long commutes” are travelled in cars and take an average of 74 minutes.  That amounts to more than 12 hours being added to the work week.  At a rate of $27.36 an hour, which is the average wage in Canada, it amounts to $330.00 a week in unpaid, unproductive time.

There have also been several studies done on the negative effects of commuting on health and wellbeing.

There are good reasons to leave town

Of course there are reasons other than price for wanting to get out of the city: a quieter environment, more space, bigger home, bigger property.  These are genuine and legitimate considerations and desires.  But if the goal is to simply get a home at the lowest cost, buyers may be better served by staying in town and considering options like a smaller down payment or a longer amortization period.