In Canada, the mortgage to income ratio is above 450% – which is higher than the 3-4 times average. Many of those loans don’t have payment insurance – meaning that if something like higher rates come along……You can guess the outcome. Similar figures are coming out a number of other countries, although Canada’s income/dept. ratio is amongst the highest. Still, we’ve seen home prices in the UK rise some 79% in the past decade, and the US, like Canada, has seen a massive spike in prices just over the past 18 months. So there’s not much doubt that certain countries, particularly North America, are in the midst of a housing bubble.
Tied to housing is inflation. Canada has openly admitted that we are facing a growing inflation problem – and a real estate crises. And now, we are finally hearing from the US propagators of “transitory inflation” (Democrats – who want to spend, spend spend – needing to deny inflation in order to do so). Now we’re hearing that, well, perhaps they were kinda off with their projections. First it was Powell, then Yellen, and the newest headline…
LAGARDE: “PHASE OF HIGHER INFLATION TO LAST LONGER THAN EXPECTED”
Take a housing bubble, rampaging mortgage debt, and the very real threat of inflation and inevitable necessity of tightening (aka higher rates). What could possibly go wrong? I wanted to review two charts. I’ll look at the US residential real estate ETF by iShares (REZ). Then I will look at HR REIT, who recently announced they are spinning off retail and office property assets and moving into residential and industrial properties. Is this a good move?
Starting with the REZ chart – I’ve added all of the indicators I typically look at on this chart. The chart itself shows that price is just starting to test its last peak of $92. Note that before this consolidation, the sector was moving absolutely parabolically. It was time for a break. Note the moneyflow momentum bars at the top fell off a cliff and have not recovered despite the recovery of the stock price to its summer highs. Momentum indicators, while hooking up, are below their old highs by wide margins. This is called divergence. Its a sign of potentially slowing thrust by this sector. The very bottom line is the AD line. Its a measurement of moneyflow. Investors have abandoned this sector aggressively, and they are not piling back in despite the fast move in price to its old highs. Hmmmmmm…
REZ seasonality suggests that, despite a bit of a move in December, its generally an underperforming sector for most of the winter.
OK – so lets assume that you are as wary as I am around residential real estate. The chart suggests consolidation, the fundamentals are kinda scary looking, and the seasonality for the sector is mediocre for the coming months. Its for this reason that I wanted to look at HR REIT. I know that many of my retired readers might own this long time dividend stalwart.
Seems to me most of the stuff we saw on the top chart (divergence, testing its summer top) is happening here. Moneyflow (AD line) is bullish, so that’s different.
My take is that investors who hold HR REIT may want to keep an eye on it. Now that they are moving into the most overvalued part of the real estate world (residential) and selling the most financially crushed parts (office space and shopping malls) at a low price – you just need to wonder if the momentum divergences are telling us a tale before a hammer falls. Keep an eye.
Hi Keith: Just reading your blog and am trying to follow your line of thought. The Canadian housing market is highly valued and mortgages are larger than many other countries on a relative scale you suggest. So if foreclosures rise, due to whatever reason, people must still have a place to live. I would suggest apartments hence an apartment REIT might be something to look at. REZ holds those but other things as well. What are you thoughts on this suggestion?
Yes–good point, although I also wonder about the valuation of the properties themselves – which are part of the stock price. That, and the ripple effect of a markdown. Still—You have a good point.
Terry–I was thinking about your question the other day – one thing i did not mention in the article is that rising rates will affect real estate investors based on their leverage/debt. That may not be easily passed on the tenants, given rental law when it comes to residential. So that is another factor…profitability.
I gather that apartment reits also fall under residential real estate? I guess the part that confuses me is that with all of the immigrants that are expected to enter Canada in the upcoming year, and University students coming back to in-person learning, wouldn’t apartment reits be bullish?
I appreciate your thoughts.
See my comment to Terry – good observation.
On your latest video called MARKET MUSINGS, you mentioned that you are holding AAL because it hasn’t broken support yet…
But assuming that you’ve been holding AAL for a few months now, when I read the chart, I see that it actually broke support at 21$ in July, retested and stayed below for 3 weeks and broke down for 5+%. So if we follow the rules we should have sold AAL after the first week of september, no? Thanks for your teaching. I have trouble with selling decision and I’d like to find out what I do wrong 🙂
Good question Francisco – we look at support as somewhere near $20. The stock is somewhat below that ($19.33 last trade I saw), but its pretty much trading sideways with no rapid selloff to indicate a technical breakdown. Its a dull chart for sure, and we still hold it (only 2% position in our Aggressive Account – not in our conservative equity platform). AKA–its not being smacked, its just treading water. I sell when support is violated meaningfully for numerous bars – which AAL has not really done. Its not a dangerous chart yet–its just a frustratingly sideways chart.
Perhaps a blog on the “New” role of the Bank of Canada, because it seems fighting inflation is well down the list. Is it to protect home buyers? Protect our overwhelming federal and provincial debt? I wonder if the Bank of Canada knows?