Canadian real estate & related securities may have more downside

January 23, 20234 Comments

Investors looking at real estate in Canada – and securities connected to real estate might want to consider some research presented in this blog. Today’s blog is a collection of my own charts, and some other research services I follow surrounding the sector. Real estate securities could include REIT’s, Home Builders, Realtors, Home Improvement Retail stores, and even financial / Mortgage lenders like banks and independents. Even peripheral companies that sell to, or service the home building industry can be impacted by broad real estate trends. Thus, real estate markets could have an impact on your stock holdings, even if you don’t have direct exposure. With that in mind, here are some thoughts for your consideration.

World Real Estate since 1975: Canada the most overvalued

A quote re the loonie & real estate from a large institutional CIO in Canada

“I used to be a Loonie bull, however, the recent swing in gov’t control (Liberal minority – Deal with NDP), has placed power in the hands of Trudeau. He might possibly be the most incompetent PM Canada has seen.  The Real Estate bubble did not start with him, in-fact Harper had strictly controlled the housing narrative in the 2009-2015 era and this limited the CMHC’s ability to have true oversight in Canada’s real estate market. In addition, Canada narrowly missing the 2008 recession, did not give the economy the proper medicine it needed to drop debt ratio’s in Canada. I truly believe that Canada will have an exceptionally tough time in a higher-interest environment. Short the Loonie against all the crosses, I think even shorting the  Loonie on USDCAD, if we fall below 1.2000. I project USDCAD in 2024 could be north of 1.4000.” Anonymous CIO quoted in BearTraps Research report

 

Canada vs US

I’ve shown this chart before:

Fitch outlook

Below: World real estate pricing forecasts by Fitch. Canada is expected to see world-leading DECLINING prices ! Matching Germany, and worse by only 3 other countries: UK, Denmark  & Australia.

Note that emerging market countries Brazil, Mexico, Columbia look pretty positive.

 

 

Recession talk: Will the Fed & BOC ease?

Some thoughts regarding when rates will be cut. Note that, even with CPI just over 6%, well off of its 8% + reading in June, we are nowhere near historic norms of 3%, let alone the rather unrealistic 2% goal of the Fed/BOC.

“Data shows that headline inflation continues to ease, but that is yesterday’s news. The market views falling inflation as a savior, but the issue is there is no longer a 1:1 relationship between inflation and the Fed funds rate. While a decline in the inflation rate back to 2% gives the Fed more flexibility to cut interest rates if the economy rapidly deteriorates, it does not mean the Fed will automatically cut rates” MarketDesk Research

 

A quick look at real estate sectors/stocks

Real estate agents

Newmark (NMRK-US) is a worldwide real estate agency. The chart suggests a base – after a massive hit in 2022. Obviously this is not a buy until that base proves to breakout.

REIT’s

The iShares REIT ETF (XRE-T) covers a broad number of real estate trusts, many of which are commercial/industrial. This implies less impact by the over-leveraged Canadian housing owner. The chart suggests a bullish breakout.

 

Home improvement retailers

Lowes and Home Depot are the kings of this castle. Both are similar looking –here’s the Home Depot (HD-US) chart. Looks like a nice neckline break after a base. Hopefully it holds…..

Home construction

I don’t know of any publicly traded Canadian home construction companies. Lots of them are listed in the USA like Toll Brothers and DR Horton, etc. Again, this is a Canadian problem, not so much in the USA per the charts at the top of the blog. But, for what its worth, the US index shows a pretty nice breakout.

Mortgage lenders

Two classes, so to speak, of mortgage lenders exist in Canada. The primary lenders (banks) and the secondary (independents). We can look at the banks via an ETF like the BMO Equal Wt. Bank  (ZEB-T). We can look at the independent lenders (often dealing with risky clients) such as Equitable (EQB-T) and Home Capital (HCG-T). I want you to note the lack of moneyflow into all  of these stocks–bottom pane on the charts. This suggests that, unless investors begin moving into the sector, the base formations are unlikely to break out….

First, the banks

ZEB suggests a base that has yet to break out. Obviously this is a chart to trade in the range of the base, or buy ONLY if it actually breaks out.

Then, the independents

Lets look at Equitable Group. Same chart as the big banks. Stuck in a range, with a neckline that has yet to break.

Home Capital Group just had a big pop. Apparently, the investment in the stock by Warren Buffett added something to the move (ya think?).

 

Conclusion

The US real estate market, while slowing, still has some life in it. Americans are not as leveraged, and real estate is not as overvalued as their Canadian counterparts. Where the strongest markets like Toronto, Vancouver, Calgary have suffered recently (and are expected to see further downside), pockets in the USA has seen huge immigration. People from other states and other countries – including Canada – are moving to states such as Florida, Arizona, North Carolina and Texas. This, due to their attractive taxation, business, personal freedom, COVID & Medicare policies. I have property in Florida, and the immigration / housing boom has quite clearly increased – not decreased –  in 2022.  Meanwhile, states with the highest levels of taxation, freedom infringements, and prior COVID restrictions such as New York and California have seen quite massive emigration (out) in 2022. Here is the net inflow/outflow data on US states. Perhaps Canada might take a lesson of freedom and taxation from this chart!

So, while real estate patterns are much more regional in the USA, its more widespread across Canada. Based on debt/capita, housing costs, and income/debt ratios,  its important to recognize that real estate influenced sectors in Canada are likely to underperform those in the USA. Some of the international markets per the Fitch charts above look outright attractive – I noted a few emerging market economies above as attractive.

Bear this in mind when you view real estate investing, or surrounding securities, in your portfolio management.

4 Comments

  • Hi Keith,
    Good observations. Living in Calgary, I would not lump it in with Toronto and Vancouver. Home prices increases here were somewhat moderated after 2014 oil price crash and secondly, Calgary is enjoying a lot of international as well as inter-provincial immigration for the same reasons you mentioned people are going to the US (lower business taxes, more freedoms, etc). That said, I am not sure that the average house hold debt burden is any better here then elsewhere…
    Ron

    Reply
    • Yes, Ron you have 2 excellent points which I was aware of–Calgary already went through a boom & bust in housing after the 2015 energy selloff. Also – very true, Alberta is seeing immigration from other parts of Canada due to better taxation policy and less restrictions. I am a HUGE fan of Danielle Smith, who is a key draw to Alberta IMO. Everything she says is calm, logical and open minded. Hope she stays in for the next election.

      Reply
  • Inflation for the last 6 months of 2022 month over month was negligible averaging .02% in Canada and .03% in the US. Higher rates and opening supply chains seem to be doing the trick.
    If inflation comes down quicker than most people think, say 3% or less Y/Y, by early summer of 2023, what does that do to real estate, bonds, and equity markets? Do they all move up together?

    Reply
    • Paul I would think that – should we see the CPI hit 3% (hard to see that in such short order but you never know)- we would hear talk of discontinued tightening or (eventually) easing from the Fed. That’s the real ticket–not that they have to actually ease, but imply it.
      Read the comment from MarketDesk Research on the blog – they feel that there isn’t a “1:1 relationship” between Fed policy and CPI– that might suggest its best to hear the Fed-speak before assuming anything.
      Having said all of that–yes, such an event would be bullish all around.

      Reply

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