We are finishing 2016 awash in contradiction. Just consider the following:
Prices in Vancouver’s housing market have jumped by 40 per cent this year. The price of a typical single-family home has hit $1.5 million, about 20 times the annual median household income. Common sense dictates this would spark a boom in new housing starts to meet what must be overwhelming demand. Instead, the city has the shortest list of homes for sale in a decade, according to the Financial Post.
There are rumblings of unseemly things afoot. Like this report about rampant non-compliance by B.C. real estate companies with regulations intended to catch and combat money laundering. And this story about shameless land speculation which only serves to fuel the rockets that are launching home and land prices into orbit. Take this example: a four-bedroom 1950s house with an assessed value of about $900,000 and an asking price of $4.2 million.
Toronto can’t rival Vancouver on the residential absurdity scale, but it too, boasts an overheated market that has driven the cost of housing beyond the reach of most residents. In some other parts of the country, however, real estate markets are in a slump.
Quantity over quality in the labour market
Meanwhile, Canada’s unemployment rate continued to fall in November. According to Statistics Canada, there are 183,000 more jobs compared to the same time last year. The question is how many of these are good jobs. Most are part time. The number of full-time jobs continues to erode.
Even in the federal public service, long perceived as the bastion of stability, with great benefits and indexed pensions, the stigma of instability looms. Never mind the royal mess that is the Phoenix pay system. The millennials the feds have so earnestly courted to renew the ranks in the wake of boomer retirement complain they aren’t getting the benefits and job security of their elders.
No wonder United Way donations and Ottawa Senators ticket sales are down this year in the nation’s capital.
The Donald effect
And then there is the rash of uncertainty spreading from the U.S., as we all wait with baited breath for the initial acts of a Trump presidency.
The U.S. Federal Reserve raised interest rates earlier this month to keep inflation under control in response to a strengthening economic outlook. Pundits expect perhaps three more increases in the next 12 months. The question is when the next may occur. Some don’t expect it before the summer. President-Elect Trump has promised to cut taxes for the middle class and commit US$1 trillion to infrastructure projects. My economics prof many years ago cited the funding of the U.S.-Vietnam War with borrowed money as the cause behind the high rates of inflation that started after 1972 and continued for a long time. Economists remain leery of how Congress may act to hinder The Donald’s grand plans. And the fortunes of the U.S. economy will have ripples around the globe.
In Canada, the question is how quick our central bank may be to follow the U.S. lead, and potentially begin a cycle that will increase the cost of borrowing. Considering how leveraged Canadians are with household debt, that could impact consumer spending. This would of course come on the heels of the new regulations that have made purchasing a home more challenging for first-time buyers. The tradeoff is that a stronger U.S. economy means good things for Canada’s export sector. And from my perspective, higher interest rates are good for people saving for retirement.
Trade agreements hanging in the wind
But add to this the global picture, where several trade agreements now face uncertain futures. Why? Because of Trump’s vow to “make America great again,” a term yet to be defined, and the unexpected outcome of the U.K.’s Brexit referendum.
Trump intends to pull the U.S. out of the Transpacific Partnership Agreement (TPP), a trade deal between 12 Pacific Rim countries, including Canada. That means it’s unlikely to go ahead in its current form any time soon. Trump also has his eye on NAFTA.
Then there is the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. This has been cast into doubt by irate dairy farmers in an economically depressed region of Belgium called Wallonia (sounds like The Mouse That Roared, or the plot for a Danny Kaye movie). That puts full ratification of CETA in doubt, and the Brexit business hasn’t helped.
Check out this legal perspective on the likely fate of these and other trade deals.
What does it all mean?
Frankly, I don’t know. We begin 2017 with no shortage of uncertainty and contrary indicators, both for the residential and commercial real estate markets, and the broader economy. Strange things are afoot.
A cautious investor in such a climate may hunker down and wait out the storm, unwilling to play the risks. At the very least, it behooves normal investors to do some really serious homework and ensure they have the fundamentals of their transaction well understood before signing on the dotted line.
And on this imprecise note, here’s to a happy and prosperous new year.
To discuss this or any other valuation topic in the context of your property, please contact me at firstname.lastname@example.org. I am also interested in your feedback and suggestions for future articles.