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.