Canadian Housing is Being Propped Up by Just One City
Without Vancouver’s gains, the market would have dipped -1.1% in February 2016
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes
The last time we gave a good run down of Canada’s housing market was in May 2015, when we noted that The Economist gave it the dubious title of the most overvalued housing market in the world. Since then, in just 10 months, prices in Vancouver and Toronto have soared to marks that are 14.1% and 8.7% higher respectively.
Frothy prices, million-dollar shacks, and buying frenzies have prompted world-class short-sellers to come out of the woodwork. For a speculator such as Marc Cohodes, who advises hedge funds on Wall Street that want to bet against the Canadian housing market, this type of classic bubble behavior is music to his ears.
“The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” says Cohodes, who was once profiled as Wall Street’s highest-profile short-seller by the New York Times. “A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.”
Mr. Cohodes has recently said that Canadian real estate has reached “peak insanity”, and it’s part of the reason that investors around the world are trying to find a way to bet against the market.
Home Capital Group, one of Canada’s largest financial institutions, was one of the most-shorted stocks last year on Canadian exchanges. The same alternative mortgage lender recently also came under scrutiny for suspending 45 of its brokers for falsifying borrower income.
Just as falling oil prices helped to drag the Canadian dollar down, the “lower for longer” price environment for crude has had a similar effect on house prices in the Prairies. Homes in Fort McMurray, the epicenter of the Canadian oil sands, have crashed an average of $117,000 in just a year.
Meanwhile, price tags in the once-strong housing market of Calgary have declined from their peak in October 2014 by -5.4%. The city, which is a financial center for Canadian energy, is bracing for a particular tough year ahead as well. Houses are spending more time on the market, and sales volume and prices continue to fall.
But it’s not just Canada’s oilpatch that is starting to see the writing on the wall. Toronto, which has helped to buoy the rest of the country’s housing growth for years, has also started to cool down.
According to the Teranet – National Bank House Price Index, prices have risen just 0.3% since October in Canada’s largest real estate market. With the prospect of rising interest rates in the future, it’s not expected to heat back up, either. In fact, TD Bank expects that Toronto will have a “moderate” decline in 2017.
And Then There was One…
For investors bullish on near-term gains in Canada’s housing sector, there is one last hope that resides on the West Coast.
Vancouver’ housing market sailed again in February, shooting up a record 3.2% in just one month. This is the best month for the market since August 2006. It was so good, in fact, that it single-handedly propped up Canada’s national index for housing.
Canada’s market as a whole saw gains of 0.6% in the month, but it would have dropped to a lacklustre -1.1% without the inclusion of Vancouver in the 11-city index.
The only problem?
While Keynes is right in that markets can remain irrational for longer than one can stay solvent, it seems that Canadian housing has turned a corner: regional markets in other parts of the country have stumbled, and the last remaining pillar is Vancouver.
It may continue to buck the trend for now, but it is a wobbly pillar at best.
Visualizing the Rise of the U.S. Dollar Since the 19th Century
This animated graphic shows the U.S. dollar, the world’s primary reserve currency, as a share of foreign reserves since 1900.
Visualizing the Rise of the U.S. Dollar Since the 19th Century
As the world’s reserve currency, the U.S. dollar made up 58.4% of foreign reserves held by central banks in 2022, falling near 25-year lows.
Today, emerging countries are slowly decoupling from the greenback, with foreign reserves shifting to currencies like the Chinese yuan.
At the same time, the steep appreciation of the U.S. dollar is leading countries to sell their U.S. foreign reserves to help prop up their currencies, in turn buying currencies such as the Australian and Canadian dollars to help generate higher yields.
The above animated graphic from James Eagle shows the rapid ascent of the U.S. dollar over the last century, and its gradual decline in recent years.
Dollar Dominance: A Brief History
In 1944, the U.S. dollar became the world’s reserve currency under the Bretton Woods Agreement. Over the first half of the century, the U.S. ran budget surpluses while increasing trade and economic ties with war-torn countries, expanding its influence as the world’s store of value.
Later through the 1960s, the U.S. dollar share of global foreign reserves rapidly increased as political allies stockpiled the dollar.
By 2000, dollar dominance hit a peak of 71% of global reserves. With the creation of the European Union a year earlier, countries such as China began increasing the share of euros in reserves. Between 2000 and 2005, the share of the dollar in China’s foreign exchange reserves fell by an estimated 15 percentage points.
The dollar began a long rally after the global financial crisis, which drove central banks to cut their dollar reserves to help bolster their currencies.
Fast-forward to today, and dollar reserves have fallen roughly 13 percentage points from their historical peak.
The State of the World’s Reserve Currency
In 2022, 16% of Russia’s export transactions were in yuan, up from almost nothing before the war. Brazil and Argentina have also begun adopting the Chinese currency for trade or reserve purposes. Still, the U.S. dollar makes up 80% of Brazil’s reserves.
Yet while the U.S. dollar has decreased in share of foreign reserves, it still has an immense influence in the world economy.
The majority of trade is invoiced in the U.S. dollar globally, a trend that has stayed fairly consistent over many decades. Between 1999-2019, 74% of trade in Asia was invoiced in dollars and in the Americas, it made up 96% of all invoicing.
Furthermore, almost 90% of foreign exchange transactions involve the U.S. dollar thanks to its liquidity.
However, countries are increasingly finding alternative options than the dollar. Today, Western businesses have begun settling trade with China in renminbi. Looking further ahead, digital currencies could provide options that don’t include the U.S. dollar.
Even more so, if the U.S. share of global GDP continues to shrink, the shift to a multipolar system could progress over this century.
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