Mostly Money

97: Ben Rabidoux on how Housing defied the worst economic downturn in history

May 30, 2021 Preet Banerjee
Mostly Money
97: Ben Rabidoux on how Housing defied the worst economic downturn in history
Chapters
Mostly Money
97: Ben Rabidoux on how Housing defied the worst economic downturn in history
May 30, 2021
Preet Banerjee

What explains the meteoric rise in Canadian home prices off of a backdrop of 3 million jobs initially lost back in early 2020 with many businesses forced to be shut down and with lockdown, after lockdown? 

Well if there’s one person who can help answer that question, you know it’s Ben Rabidoux. He’s going to dive deep into a number of factors that, taken together, may help you figure out what’s been happening. Here’s just a sample of the topics we cover in this episode: 

  • Most of the people who lost their jobs weren’t in a position to buy in the first place
  • Those who were, tended to see their financial situations improve during the pandemic
  • Lower interest rates have further increased debt servicing ability
  • Population dynamics negatively affected the rental market more than the resale market
  • Changing consumer preferences, and so much more. 

Grab your popcorn, because Ben Rabidoux is going to enlighten and entertain you in this episode of Mostly Money.

Ben Rabidoux is the President of North Cove Advisors, a Canadian research firm that works exclusively with institutional investors around the world, by providing coverage of Canadian housing, macroeconomic and household credit trends. He has also just launched a new firm, Edge Realty Analytics, that provides market intelligence to real estate industry professionals. You can learn more at EdgeAnalytics.ca.

LINKS

Twitter: https://twitter.com/BenRabidoux

Edge Realty Analytics: https://edgeanalytics.ca/

North Cove Advisors: https://northcove.net/


Show Notes Transcript

What explains the meteoric rise in Canadian home prices off of a backdrop of 3 million jobs initially lost back in early 2020 with many businesses forced to be shut down and with lockdown, after lockdown? 

Well if there’s one person who can help answer that question, you know it’s Ben Rabidoux. He’s going to dive deep into a number of factors that, taken together, may help you figure out what’s been happening. Here’s just a sample of the topics we cover in this episode: 

  • Most of the people who lost their jobs weren’t in a position to buy in the first place
  • Those who were, tended to see their financial situations improve during the pandemic
  • Lower interest rates have further increased debt servicing ability
  • Population dynamics negatively affected the rental market more than the resale market
  • Changing consumer preferences, and so much more. 

Grab your popcorn, because Ben Rabidoux is going to enlighten and entertain you in this episode of Mostly Money.

Ben Rabidoux is the President of North Cove Advisors, a Canadian research firm that works exclusively with institutional investors around the world, by providing coverage of Canadian housing, macroeconomic and household credit trends. He has also just launched a new firm, Edge Realty Analytics, that provides market intelligence to real estate industry professionals. You can learn more at EdgeAnalytics.ca.

LINKS

Twitter: https://twitter.com/BenRabidoux

Edge Realty Analytics: https://edgeanalytics.ca/

North Cove Advisors: https://northcove.net/


Preet Banerjee:

What is more invincible Superman or Canadian Real Estate?

Ben Rabidoux:

Oh man I read. Canadian Real Estate has been absolutely bulletproof. It's pretty hard to see anything that's got more of a Teflon coat than Canadian Real Estate right now. Right? I mean, we go through like, do you go through 100 year pandemic, your worst economy on record, which I'm sure we're gonna talk about all of this. You come out the other side and you got housing? Absolutely exploding house prices, booming. I mean, it's just insane.

Preet Banerjee:

At the start of the pandemic, did Ilan musk go on an sctv revival show and say Canadian Real Estate was going to the moon? I don't recall that happening. So what else could explain the meteoric rise in home prices off of a backdrop of 3 million jobs initially lost back in early 2020? With many businesses forced to be shut down with lockdown after lockdown? Well, there's one person who can help answer that question. You know, it's Ben rabiu. He's going to dive deep into a number of factors that taken together may help you figure out what's been happening. Here's just a sample of the topics that we cover in this episode. Most of the people who lost their jobs weren't in a position to buy in the first place. Those who were tended to see their financial situations improved during the pandemic. We have lower interest rates than have further increased debt servicing ability. We also take a look at population dynamics that negatively affected the rental market more than the resale market, changing consumer preferences and so much more. So grab your popcorn because Ben rabiu is going to enlighten and entertain you in this episode of mostly money. This is mostly money, and I am your host, Preet Banerjee, and let's get down to business. Today's guest is backed by popular demand. If you have questions about housing and real estate, like pretty much everybody does, he's your guy, then revenue is the president of North Cove advisors, a Canadian research firm that works exclusively with institutional investors around the world by providing coverage of Canadian housing, macro, economic and household credit trends. He also just launched a new firm edge realty analytics that provides market intelligence to real estate industry professionals, edge analytics.ca. And I'll be sure to ask Ben about that at the end of this episode as well. But for now, Ben, welcome back to the show.

Ben Rabidoux:

Thanks for having me. It's good to see you again.

Preet Banerjee:

Yeah, it's it's too bad. We're not here in person drinking whiskey. It's normally me doing all the drinking and you sort of holding a whiskey glass and talking because you have so much to say and to share with people I feel it's almost unfair to you to sort of pour that glass because you don't actually get to enjoy it, because they make you do all the talking. But how does it feel? First of all, to be the most requested guest on this show? Yeah, that's Hey, that's great. You know, it's it's a topic I think that's near and dear to everybody right now. I mean, real estate is just it always seems to be topical in Canada, but perhaps even more so than right now when everything's just going completely insane. So, always happy to be back talking about? Yes. So you know, I have to ask you what is more invincible, Superman or Canadian Real Estate? Oh, man, I read. Canadian Real Estate has been absolutely bulletproof. It's pretty hard to see anything that's got more of a Teflon coat than Canadian Real Estate right now. Right? I mean, we go through like, do you go through 100 year pandemic, your worst economy on record, which I'm sure we're gonna talk about all of this. You come out the other side and you got housing? Absolutely exploding house prices, booming. I mean, it's just insane. Well, listen, if you were to raise Stanley from the dead and say, Hey, how about this super hero that has all these powers and no invincibility be like, no, it wouldn't sell you need some kind of vulnerability, right? You know, everyone has to fall down at some point in time. So it would make no sense to create a comic book character modeled after Canadian Real Estate that is so invincible. You know, if you look in the in the movies of Superman, someone fires a bullet like a rifle shot right to the guy's eyeball. I forget which movie it was, but it bounced off his cornea. Canadian Real Estate is watching by the sideline. The thing is that all you got in Superman to with Christopher Reeve, remember his girlfriend dies and so he decides, you know what, I will go fly around the world backwards counter to the Earth's rotational Spin to turn back time. questionable physics. Yeah, wherever they go, we need you to roll with it. And on the sideline is Canadian Real Estate saying childsplay? Pretty much. So yeah, so let's, let's unpack all of this. And what's been happening in, in Canadian housing, it's, it's like you said, you set it up perfectly, you know, 100 years sort of pandemic. It's, we've seen these lock downs last four months. And in Ontario, it feels like there's been very little reprieve from from the lock downs. And at the beginning of the pandemic, we saw 3 million jobs lost in March and April of 2020. So let's go deeper. Why did that alone not have the expected impact? Just looking at jobs?

Ben Rabidoux:

I mean, there's so much to unpack here. And you're right, it was a tremendous hit to the economy, people. I mean, it's hard. It's hard to overstate just how significant that was for the economy, right. I mean, the magnitude of the economic decline was unprecedented. The job losses were unprecedented. I mean, it was magnitudes greater. I mean, I did the math, and it was almost nine times greater the job losses, cumulative job losses in those two months of March and April 2020. Then during the entire financial crisis, I mean, it was just enormous. But maybe the preface the discussion, if we rewind the 2019, one of the interesting things, and I don't remember the last time I was on pre to when we had the discussion, but I feel like it was maybe early 2019, I'd have to go into luck. But

Preet Banerjee:

I think it was early 2019, you said housing was about to crash sell everything. That doesn't sound right. Yeah, I forget what it was. And I forget your prediction, I think you you had a very measured approach. If I know you,

Ben Rabidoux:

it's funny, though. It's, I'll have a conversation with, I don't want to throw anyone in the media under the bus for like 10 or 15 minute conversation with someone in the media. And it'll be like, they'll remove the snippet, then right on to like the one sensational soundbite out of a measured 10 or 15 minute conversation. And that's the thing that makes it in the news, right, like Canada's biggest housing, bear comments. Yeah, right. It's funny, because, you know, you and I were talking offline before we got on here. And in 2019, it became pretty clear to me that the inventory levels across the country were plunging, right, and you sort of have to be a slave to the data in this business, you can't, you can't have strong opinions, you have to be able to change them when they went when the data changes. And it was clear that inventory was plunging sales were were fairly strong, but not explosive. But the real story through 2018 was just this unbelievable, steady decline in active listings across the country. And I was making the point to my clients, probably by mid 2019, that like, Look, if something doesn't change, here, we're gonna see an explosive move to prices to the upside, because if you go back even further, the last time we had sort of a really frothy market was 2016 2017. The feds were quite concerned, they came in they intervened with some measures to tighten credit be 20. And then you also saw these sort of regional approaches like the foreign buyer taxes, right. And, and when I look at the market, then and then I looked at it again, in 2019. It's like, the market was tighter in most metros across the country in 2019, than it was in 2016 2017. But prices weren't reflecting it yet. And so I was saying to my clients, like, Look, this is going to change, or we're going to see a big move to the upside. And that was my story kind of right through 2019. And it's funny, once you sort of turn a little more, I don't know, optimistic isn't the right word. But once you just kind of say like, T's you know, I feel like the bias here is gonna be to the upside. All of a sudden, you're not as popular in the media, right? And everyone wants a sensational soundbite.

Preet Banerjee:

If it bleeds, it leads.

Ben Rabidoux:

That's exactly right. And so heading into the pandemic, I think most people don't realize that the housing market across the country was already way tighter than it was in the period of 2016 2017. And you can measure that in a couple different ways. You can look at the sales to new listings ratio, or you can look at it in terms of months of inventory. So how much inventory is on the market? How many months would it take to sell that inventory? And those are the two main go to measures of supply and demand. And both of those were absolutely screaming that prices, were gonna have a big move. And so that was the setup in early 2020 pre pandemic, right. And then so then along comes this pandemic, as you said, you get these enormous job losses. But what was interesting, and I think what people missed in the early days, is that, overwhelmingly, those job losses were in the lowest income tiers. Right. And so I did some some work on that I put a note out for my clients just looking at Hey, how was the Canadian economy or the Canadian housing market did so well in spite of the economy. And it turns out that if you sort of segment that the jobs by income band, you find that the highest 40% of employees in the country that earn the equivalent of kind of $30 or more employment declined by 4% Peak to trough. So in kind of February, March, it had recovered by June. And then by the end of the year was 10%, higher than pre pandemic levels. And so all of the job losses and it's sort of intuitive. Now, of course, it was all in the kind of retail and hospitality sector, right. And so that was the sector that was hit them that by far the hardest. And the dirty secret of this pandemic is that if you're in that top half, even of the income spectrum, this is like, this is the best time for you, right? In terms of your finances, you've got these ultra low interest rates, and you've got nowhere to spend your money. Right, you're you're probably on affected you're able to work from home. And and so it's it's the unfortunate reality is that this pandemic is way more affected the lower income tiers than it did even kind of the upper half. And that matters a lot for housing demand, of course, because if you're in those lower income, chances are you may not have been active in the resale market to begin with. Right. And so it was this, it was this kind of, you know, storm for the lower income tiers, but it ended up being kind of a tailwind for demand for the higher end of the market. And that was missed in the early days of the pandemic, that jives with what I've been seeing in terms of even just like on the ground, looking at the types of businesses that, you know, have the for lease or sale signs up on the windows, the big office towers, everyone went and started working from home, those workers themselves are at home. And they didn't suffer a drop in income. But they also lost the ability to spend a lot of money on travel, and entertainment and other things. So to your point, the people who were not in a position to buy homes in the first place, those were the ones who got deeply affected, and those who were maybe on the margin, things got a lot easier for them. So that's certainly one sort of aspect to look at. But more specifically, I want to talk about the decline in labor income that you saw in the data. And then the government's response in terms of all the different support programs that we saw. And I want, I want to get your sense as to the level of support that was provided relative to the labor, income loss. And then I want to know, how that compares to other countries around the world. Absolutely. So I think the response to this pandemic is going to be studied and debated for many years, right? And then there's a saying that you kind of you can't criticize the outcome of Battlefield surgery. It's like, it's, it's an emergency. It's like, the shits about to hit the fan, you have to do something, even if it's wrong, right? You just you have to do something, right. And there's no question that the government had to step in and provide some very aggressive income support, because we were staring at an economic abyss. And so they did the government in Canada stepped in, and they, to your point, they offset lost labor income by a factor of three, and in the second quarter. And so to put that in context, so if we look at, you know, I look at real GDP, year over year, we saw the steepest decline on record, and in the second quarter of 2020. And yet, you had this weird phenomenon where household disposable income growth surged to the upside. So you had the economy contracting by the steepest on record, but yet household incomes growing by 16%, you're like, well, that, that never happens in a recession. Right? And then so we hear like, What in the world is really going on here. And so during that second quarter, which was that main lockdown quarter in 2020, that real scary quarter, when everyone's just like no one was leaving their house, we had no idea what we were dealing with Was this the plague like it was just that real freaky quarter. And what we found is that lost labor income, so labor income across the economy declined by about $20 billion sequentially in that quarter. But then if we look at government transfers to households, they increase by about 70 billion. So another way of saying is that for every dollar of lost labor income in that quarter, the the government offset it with $3 of transfers, right. And so when we compare that across countries, it is perhaps the most aggressive response from any developed country. And we can see this if we look at things like the the change in government deficits between 2019 and 2020. When we look across countries, most advanced economies, of course, saw their deficits blow up, generally, you saw kind of a 10 percentage points swing, right. So if they were running a minus 1%, Deaf budget balance in 2019, all of a sudden, it was like minus 11%. Like this was across the board every every country did this. And so the average cost of bass comes with about 10%, Canada was closer to 20%. We saw in almost 20% swing in the budget balance for 2019 to 2020. And that is the highest among developed countries. So just to dive a little bit deeper on that, did you take a look

Preet Banerjee:

And, you know, what was the base that some of those other countries are coming? Were they more deeply indebted than Canada? Or was Canada, you know, point to your into that scale as well pre the expansion in balance sheets.

Ben Rabidoux:

Yeah. So this is just looking at sort of the the projected deficit, or just the overall balance the budget balance one year versus the next. And so Canada, when we were in 2019, we're sort of heading for like a one to 2% budget deficit, and then all of a sudden it exploded end up being 20%. And so yeah, Canada was running a deficit most countries were, but certainly the magnitude of the increase in the in the deficit was far larger in Canada than it was in other countries. And, you know, we can debate it's hard to know whether that was the right approach. At this point. I think there's some valid questions around whether some of the early iterations of the income support programs were targeted sufficiently. Right. So you had these stories of these high school kids on serb, right, that wouldn't have been working anyways. But they're able to collect serve. And they if there's stuff like that, you're like, wow, maybe. But again, it's hard to criticize it, because in the moment, what was desperately needed was money out the door and into households as quickly as possible. And the government to the credit, absolutely delivered that. And so we really won't know for a couple more years how this plays out, because it could turn out that Canada ends up with a much more durable recovery than some of these other countries that didn't spend as aggressively I don't know, I don't know. But But, you know, it's important to frame this properly, that Canada did so well, in, in large part because the government blew out their balance sheet to support households.

Preet Banerjee:

As you mentioned, normally, during a recession, people dip into savings, and they may also tap into credit. So let's take a look at what happened with credit. And let's break it down to obviously, with the the rise in house prices, you would expect that, you know, people have to borrow more money to support these incredible valuations that that changed, like the in terms of changing valuations. You know, the stories that I know, you've seen 40 offers on a house bidding wars where, you know, the the sale price is $400,000, over asking. And the second highest bid was 100,000. Over asking. So we could talk about the blind process and all that stuff. But let's first talk about the dynamics of the different types of credit like mortgage credit.

Ben Rabidoux:

Yeah. Well, you're absolutely right. So this was a strange recession in so many ways, right. So we already talked about this weird phenomenon where you had massive declines in GDP, but this incredible rise in household disposable income, right? You don't see that during recessions. And as you mentioned, you generally see an impairment household balance sheets, during recessions on aggregate, you see people draw down savings, you see, credit card, delinquencies go up, you see mortgage delinquencies go up, like all these things that you would normally expect to see during a recession. We saw none of that in the last year. And in fact, it was the exact opposite. And so when we look at what happened, consumers, I'm hesitant to, to frame it this way. Because I don't want to minimize the reality that this has been a terrible pandemic for a lot of people. But when we look across, in aggregate, all consumers in Canada, households actually came out of the recession in better shape than they went in. Right. And again, that's not to, in any way diminish how terrible it's been for certain households. But for example, we look at the household savings rate, it absolutely exploded. In the early days of the pandemic, we saw household savings rate almost hit 30%. It's still in the teens, right? And for context, that was about one and a half percent pre pandemic, right? If we look at things like just excess deposit sitting in personal checking accounts at charter banks, and we look at the trend pre pandemic, we're about $100 billion above that pre pandemic trend. So there's just so much cash sitting in consumer, it just in checking accounts waiting to be spent, right. And what the other thing that happened that's really interesting is you had this steep decline in non mortgage, consumer credit, and especially credit card balances. And this makes sense, of course, when we look at how much cash just sitting in checking accounts, if you're earning whatever point 2% in a checking account, but you're paying 20% on your credit card. It makes sense to pay off the credit card, right? And we've seen that in like the decline in in credit card balances has been stunning. So when I look at chartered banks and their holding their credit card loans here in Canada, they've declined by over 15% year over year, which is not what you'd expect to see and so overall consumer credit is down over 2% compared to last year at this time.

Preet Banerjee:

Do you factor in the rise in the explosion in the new buy now pay later companies because what I've seen from from some of the data from cards defy the amount of people who are using buy now pay later Services has exploded in terms of number of transaction sizes of transactions. And it's in some cases, it's an alternative to credit card usage. But in other cases, people are using credit cards for the buy now pay later transactions as well. So just curious, have you looked yet into the buy now pay later space?

Ben Rabidoux:

Well, that's a great question. I that's actually really a few points that I do need to dig into that I, my thoughts on that. And I could be wrong. So I will look into this. But my initial thought would be that that's one of those segments of consumer credit that is growing rapidly, but it's still a relatively small portion of the overall pie. That's my bias on that. But I could be wrong. So I will look into that, because that could absolutely be something interesting to to look at. But even setting that portion aside, right? What we know is that when we look across all credit products, that households are paying in Canada, all borrowing mortgages, credit cards, autos, etc. And I would assume all that payday loan that that's still registered as as consumer credit, and I've got to think the Bank of Canada aggregates that as well. You know, overall, non mortgage, consumer credit has been falling in Canada, I mean, it just makes sense for most people, when they're sitting on the sort of excess cash that we see. And they're earning almost nothing on it, they'll use that to pay off their high interest credit card, or they use that to fund consumption. And that's pretty much what we've been seeing, right. And so just to get back to kind of this the story here, like we came out of this recession with households in much better shape than they went in, and we can measure that by various different metrics, right? So household savings rate, way up cash on balance sheets way up, the debt service ratio fell sharply, right. So this is the share of household income that goes towards servicing debt. And when we entered the recession, we were at 30. Year highs, right. So that was a real concern, we had a lot of debt, we had a lot of a lot of income being diverted to support that debt. And then you go through the recession, you have interest rates, plenty of households pay off high interest, credit card debt, you come out the other side, and the household debt service ratio is way lower. And so it's this really strange thing where households have done better coming through the recession in aggregate in aggregate, right. And we see this and things like consumer insolvencies, consumer service has been one of the wildest charts through this whole pandemic, because it was rising quite sharply, right through 2019, into early 2020. And then it's just like it hit a wall and it's plunged and through most of the pandemic, it was down almost 50% year over year. Wow. And I've got this chart that you probably saw, I got this chart, we kind of annotate. Here's the financial crisis. And you see consumer insolvencies spiked during the financial crisis. And they're up, you know, 40 50% year over year, and then you get the COVID crisis. And it's literally the mirror opposite they they absolutely plunge.

Preet Banerjee:

Yeah, it's like completely upside down. And I know that part of it was, you know, the courts were closed, and you actually couldn't have creditors going after people. But part of it, I think, is explained by like you said, the improvement to household conditions, higher savings, mortgage deferrals, they were kind of saved by you know, the support lower interest rates and what have you. So

Ben Rabidoux:

it actually Preet let me jump back in because you make a good point, the mortgage deferrals, we can't overlook how significant that was in terms of just freeing up spending power or saving power for for households, right. And at peak in June, we had over 70, almost 70% of all mortgages in Canada, were in some form of payment deferral, right. And so when you think about the monthly payments that would normally be going out, and now all of a sudden they're not going out and you're instead able to save that are diverted elsewhere. That went a long way. I mean, that ended up being there was a lot of concern in the early days. Because when we look back at the financial crisis, we go back even further to kind of the late 80s, early 90s. We saw mortgage deferrals in Canada never really ever got up above 1% total, like never. And here we were with 16% of all mortgages seeking deferral, apparently because of, of cash flow issues. Now, it turns out, with benefit of hindsight, that vast majority of those were taking more out of caution or, or convenience than absolute necessity. But who cares? It was one of those programs that was phenomenally successful. It didn't cost anyone anything, the taxpayers weren't on the hook for that. The banks by and large, just kind of kept chugging along and making their their money and, and so that's one of those programs that I suspect every time that we're going to go through meaningful recession. Now you're going to see banks and the government cooperate on something like that because it was just so effective.

Preet Banerjee:

To your point. A lot of people took advantage of these programs out of an abundance of caution more than they had to yeah They weren't really caught between a rock and a hard place. Because I think, you know, there were early predictions as to Wow, look at all these mortgage deferrals. And when these programs stop, things are going to be awful. But that didn't really materialize at all did it?

Ben Rabidoux:

Well, it didn't. And it's funny because I think any rational observer who saw 16% of mortgages and deferral, right, which was, by the way, which was multiples of what we saw in the US, anyone looking at that had to have a level of concern, right, but it's just ignorant disagree. I mean, I know there are people in the mortgage industry like nothing, but like, really any rational observer would look at that be like, wow, this is really concerning. Right. But I'll tell you that by the summer, it was very clear to me, I should say something by kind of the fall, the early fall, I did some work on it. And we just said, Okay, let's do a hypothetical, right, let's just say that every single one of these mortgages that are still in deferral, right, because they started to roll off, you saw the numbers decline. And so by that by September, you can't see Okay, we got X number of mortgages in deferral. If the banks were to seize all of those tomorrow, and list them all for sale, what does that do to the market balance? And what was what was stunning is we're sitting at that time at 30 year lows in active investor inventory across the country. And had you taken all of those mortgages that were in deferral and instead foreclose on them tomorrow listed them for sale? You're still at a 20 year low in active listing. Wow. And so at that point, it's just like, Okay, well, we can safely say that this just doesn't matter. Right, there is no deferral cliff, if there is it's going to be absorbed into this incredibly strong resale market. And so I very quickly abandoned that as sort of a meaningful trigger for any sort of price correction.

Preet Banerjee:

And with housing prices accelerating so much. And I know years ago, years ago, you're banging the drum saying, hey, people need to pay attention to the growth in key locks. And just how that is expanded so much. Have you seen? Or do you have data on what's happened with home equity lines of credit? During the pandemic?

Ben Rabidoux:

Yeah, they really haven't moved. It's been really interesting to watch. Actually he locked balances are actually I just looked at this recently, they're about 1.3% year over year, which is nothing. The reality is that it's just far cheaper to do a refinance on your mortgage right now than it is to do a HELOC. And so it's hard to know how much Home Equity people are pulling out of their homes. I suspect it's a lot. But we can't capture that clearly in the HELOC data. But But I will tell you this much. If we look at single family house prices across the country, they're up $180,000 compared to last year at this time, wow, that's not using the average number. Because that's sort of skews based on the shifting composition that's using the the house price index, the benchmark price which sort of tries to control for change. So I mean, that's a real number as far as I'm concerned. So people should quit their jobs and just buy and sell houses and they'll make more money. That's right. I mean, that's, that's unfortunately, I think what we're gonna start seeing, we're already seeing it to some extent, you get this bizarre misallocation of human and financial capital during these crazy booms. But my point is, that is a ton of home equity. That's a record amount in terms of a one year growth. And it's stunning to me that he locks haven't moved. Really right. And it tells me actually that if anything, there's there's significant more room for people to borrow and, and to support big ticket expenditures in the economy.

Preet Banerjee:

Yeah, it does sound like you know, if the reopenings the the removal of lockdowns, even if that is, you know, sort of diffused, and there isn't one point in time, it feels like the household is ready to do their part in terms of spending when they can, which bodes well for the economy.

Ben Rabidoux:

Yeah, I think that's right. I do agree with you completely. The setup is set up completely for a very strong back half of the year, reopening the economy, if anything, the risk is that we see inflation run a little hot and it spooked the bond market. That's the one thing I'm concerned about is that I do think you're gonna have a bit of an inflation scare. And you could see bond markets, the bond yields start to really move, which then affects mortgage rates. I mean, it's it's it's, if anything, it's the big risk right now.

Preet Banerjee:

Some of the other factors, population growth. Yeah. And I know that this is something again, you've brought to the front burner for a lot of people and you said, Hey, take a look at population and factor that into your supply and demand analyses. And during the pandemic, we saw that population growth really didn't occur to the same levels that it did before. But the nature of the slowing of that growth and the sources of that had an impact on different parts of the market. So can you walk us through what happened with different types of population growth and why that translated into you know, the dynamics we saw with house prices and So rent.

Ben Rabidoux:

Yeah, absolutely. So this is, I continue to think the population growth dynamics in Canada are one of the most misunderstood drivers of the economy. Right. And I, and it's still I banged my head against the wall every time I see someone draw a straight line between government immigration projections, and population growth, right? You still today, I mean, we've got the government talking about 400, the target of 400,000 immigrants for 2021, which is a record and then people are saying, well, you're gonna have massive population, but you don't understand the inner workings of population dynamics. Okay. And so I'll walk people through that quick, I've spent a lot of time looking at this. But But bottom line, if we go back to 2019, at peak, we had population in Canada, growing by almost 600,000, year over year, we just an enormous number, we could, you can't build enough housing, to house that many people, right. And if anything, I would argue that there was sort of a policy, I don't call it a policy error. But there's a mismatch there, where if you're going to target massive population growth like that you need buy in from municipalities to be able to house everyone, right. But it's important to look at what actually drove that population growth, because you need to break out population growth into three buckets. Okay, you need to look at what's happening with net immigration. And that's the one that gets all the headlines, right. So this is like, when you hear Canada talk about 400,000. Target. That's how many people that want to bring here on a permanent basis. But then you lose people. I know, it's hard for people to Canadians, to think but there are people that emigrate out of Canada, and they'll go to the US or go to other places. And it's not a small amount, right? In a normal year, it'll be anywhere kind of 100 150,000. So that 400,000, we'll probably end up netting out somewhere around 250. Right. And that's, that's the big driver. But then you've got two other elements as well. One is natural increase, which is like, births minus deaths. And that's plunging, right? It's funny, there was sort of a joke in the early days of pandemic, like, oh, man, there's going to be the COVID, baby boom, you get all these people locked up with nothing to do, it's like, and the opposite has happened. We've seen birth rates plunge, right. And that's been an ongoing trend for decades. But bottom line that's falling sharply, and you might add, you know, 60,000, year over year from that going forward. But the wildcard and the point that I've been hammering on is this group called non permanent residents. And these are foreign students. These are work permit holders, refugees. These are people who come to Canada, but they're not here on a permanent basis, they have not yet been granted permanent residency. And that's a rotating door, you have a lot of them coming into here, you have a bunch of leaving. And so it leads to these wild swings in that number. And to put some context on it at peak in 2019, that one group was adding 200,000 to the headline population. Today, that group is minus 100,000. Okay, which is exactly what I said, What happened we hit when we get into a recession, right. Now, to go back, we look at the headline, population growth rate, we hit almost 600,020 19. Fast forward to mid 2020. record low we'd never added so few people, the total population was less than 150,000. year over year. Right. And so if you were just to look at that one chart that, wow, that's hugely bearish for housing. Right? It's 150,000 is nothing right, when we're used to averaging kind of 300 400,000. But it gets back to the to the point well, what was it that caused the population just to fall so sharply? It was the fact that you had a pile of these non permanent residents leave? And you had very few come here, right. And so you ended up with that cohort, drag the overall population growth down? Well, then you go, well, who makes up those cohorts? Are they buyers? Are they renters? And by and large, they're renters. It's foreign. Like I said, it's foreign students is temporary workers. And so if you just looked at the population growth rate, you'd say, Wow, that's really bad for housing. But in reality, it's really bad for the rental market, not for the resale market. And we saw this to some extent, in places like Toronto where we saw your condo rents in the downtown core fell about 20% from peak levels, as you sort of get further away from the big city centers, you get less and less of an impact on rents, but when overall and almost all metros have have softened, and you've seen vacancy rates rise, right. And so, you know, again, this is an issue for the rental market was not an issue for the resale market. And by the way, I'm quite comfortable saying we're not going back to peak population levels for quite a few years. But for a number of reasons that we can walk through but you know, anyone that's drawing a straight line between these headline immigration targets and total population growth is completely missing the boat, and I think it's gonna matter for the rental market. I do think we're gonna have you know, a bit of a shock rental market for a couple of years here for not just because population was gonna be weak, but but also because you've got just a ton of new rental supply being built.

Preet Banerjee:

Let's also talk about consumer preferences. And so one of the other things that we've been seeing in the headlines is, with work from home, people are thinking differently about the spaces that they live in. They are thinking differently about, you know, especially early on, when we had no idea how long these restrictions would last people were talking about, oh, a second wave, oh, the third wave or potentially a fourth wave and so on and so forth. And varying levels of ineptitude, at different levels of government in terms of handling gun restrictions and lockdowns and responding to the data. A lot of people said, Well, you know what, I'm going to move out of the city or I want a bigger space. And so what does the data actually say?

Ben Rabidoux:

Why it absolutely bears that out? Right. So I just, I mean, actually was interesting, the Bank of Canada had a great chart on this, and they looked at the price increase on dwellings, as you sort of drew concentric rings around city centers, right. And what they found is, as you got further out, the price increase has actually accelerated. Right. And this is consistent with what I was saying. I mean, at one point, and I might butcher the numbers, but I'll sort of be directionally right or in the right ballpark here. But at one point when I looked across the real estate boards, right across the country, right, and I think I looked about 30 Regional real estate boards, you had like 20 of them that we're seeing host prices increase in excess of 30%. year over year, right. It's not average, this is like house price index. Right. So so you know, compositionally adjusted. And of those 20. There were only like two that were top 10 metro areas. And so you had all of these kind of like the cottage countries and all the, you know, anywhere where you're you're sort of further away from the from the big cities, prices were exploding, absolutely exploding. And you're absolutely right, it was a preference for lower density, single family, housing, right. And even if you just look at, let's say, the GTA, and you segmented into condos in the 416 condos and the nine to five single family 416 single family 905. And you look at the change in sales rate through 2020. It's very interesting is by the end of the year, we ended up overall, home sales were up somewhere about 7%. year over year, at the end of the year, up that much. By By the way, that's amazing that we ended 2020, up to 2019. That alone is crazy. But then when you looked across segments, it was like well, condo sales in the 406 were down substantially. And I probably butchered the number call it like 15% year over year, condo sales in the nanofiber down a bit single family sales in the 416 were like we're up a touch. And then the single family sales in the 95. Were up massively. Right. And so we saw this rate across the country, single family prices were accelerated the demand for single family was huge. And you had this mismatch between what we've been building and what the demand suddenly was right? If you look at housing stocks over the last few years, the last 10 years, we've seen a consistent decline in single family house starts and has been replaced by a huge surge in both condo and purpose built rental construction. And people really don't realize how much purpose built rentals have ever run up. And it's it's it's stunning. Really. I mean, you look at what's under construction right now across the country, you've got almost 100,000 purpose built rentals, you're less than 60,000, single family homes, right? And you say well, what's in demand right now it's the single family homes and the rentals are actually a little soft. And so it you ended up with a situation where the supply and the demand were completely out of whack. And, and consequently you have these huge booms in these, these smaller cities. And I'm not sure yet the big question for me is what happens going forward? I'm torn on this one I I don't think the cities are dead by any means. I really don't buy that narrative. So I do think you're going to start to see migration back to the city cores as things reopen maybe not right away, but eventually. But there's a part of me also the snake cheese. You know, you got Starling coming up. You got people able to access internet from afar, which they never used to be able to in some of these smaller areas. Like maybe there is like a secular kind of tailwind to this as well. So I'm sort of torn on this. There's I don't think there's any way we're going to be here next year talking about you know, I don't know Owen Sound where we're I'm quite familiar with being up almost 50% year over year. That's absurd. I mean, just completely absurd.

Preet Banerjee:

The conversation with Ben robidoux continues in just a minute. But first, a few thank yous to listeners who left comments on Apple podcasts. Thank you to funk love 82 who has graciously offered to buy me a drink and hey, the COVID-19 lockdowns are lifted, hit me up. Also thank you to a girl and a garden for your kind comments as well. And to everyone who leaves ratings and comments on Apple podcasts, I appreciate them. And I do read them all. I produce the podcast for you, the listeners, and you know, I keep wrestling with whether or not to run ads on the podcast. But this is Episode 97. And so far, it's been ad free. So you know, I don't do this for the money. And for now, I really don't have anything to sell you or services to provide? You know, come to think of it. Why do I post this? doesn't make any sense. But I digress. Now, let's get back to the conversation with Ben rabiu, shall we? Yeah, so I think you know, one of the one of the big questions that I've been hearing from a lot of people that is Canadian housing has been somewhat invincible, and no one would have thought pre pandemic that we would see what has transpired in the last, you know, 16 months, what have you in terms of the price acceleration, just the sheer increase in prices? If you are one of those people who is potentially was in the market, and now maybe your situation is a little bit better, and you're thinking, you know, what I'm in a position to buy. But I've just seen these massive short term acceleration to the point where everyone's talking about people are asking, government should intervene ways in the Bank of Canada doing more, everyone's asking questions. If you are to give advice to someone who's in this position, do you tell them to? Because this is what they're thinking in the back of the mind? Do I wait for a correction? Or do I just get in now for the fear of missing out? Because this is my last chance? What are your thoughts on that?

Ben Rabidoux:

Well, I'm going to say what I've been saying for years on your show. This is a I can't give blanket financial advice. And everything's gonna depend on your own personal circumstances, your own, you know, balance sheet and income expectations. But what I would say is, if it makes sense for you financially, to buy now, and you can buy and not, and still have some buffering your budget, do it. If you can't, it's probably going to be a pretty good time to rent for a little while the rental rental market. I mean, I don't buy for a moment. I mean, look, rents have bottomed in Toronto, and I don't think they're gonna go dramatically lower by any means. But we're not snapping back to 2019 levels anytime soon, it's gonna be a long, slow grind to get back to those peak levels, as far as I'm concerned. And that bodes quite well, for renters for a little while. I'm just not going to slick. It gets back to something we've talked about for a while. And it's it's gotten even crazier. I mean, when you look at just how driven the Canadian economy is, by this housing boom, it's just I mean, it's hard to wrap your head around me if we look at just residential investment, which is new housing, construction, renovations and ownership transfer costs, which is things like realtor commissions, and your legals and stuff like that. That alone is about nine and a half percent of GDP, which is absurd compared to any other cyclical peak in the country. I mean, any other previous cycle peaked around 7%, the US at the peak of their bubble, was just a little over 6%. And we are so far above anything that looks remotely normal. That component of GDP alone has been half of the economic growth since 2018. It's been completely absurd, right? We now spend three times more on realtor commissions, generally will say auditor transfer cost, but primarily realtor commissions, then all businesses across the country spend on research and development. I mean, it's it's crazy, right? It's crazy. And, you know, there was a stunning chart that they saw from the OECD, where if you look at all investment across the economy, right, so residential investment is one component, but you've got businesses spending, money investing, government investing. And so overall, it's what we call gross fixed capital formation. And if you look at Well, what share of gross fixed capital formation is just residential housing. In Canada, it's about 40%. Okay, and when you say, Well, that doesn't like what does that mean? Right? Well, to put it in context, if we look at all OECD countries, and we will look we go back to 2000. So you look over the last 20 years, there are only been three examples of countries that have gotten above that level. And it was Greece, Ireland and Spain, all in the mid 2000s. All of them after that suffered just enormous economic fallout from those housing booms. And and the reason is fairly simple. It's that in order to have the economic productivity and the growth that you need to support prices at these levels, we need businesses investing in Things that are gonna make us more productive over time. And we're not seeing that in Canada right now. And so I don't know when this matters. But eventually it will matter, right? Like, it really will. Like you can't just create this economy of just progressively buying and selling more expensive housing to each other.

Preet Banerjee:

When you think about it, there's there's some people who think, you know, I've got the entrepreneurial itch, I can try and go and get a loan from a bank to start a business. Or I can just go and start buying houses and flipping them. And that seems so much refractive. Well, this is my

Ben Rabidoux:

point, right? Because these housing booms, not only do they end up with a misallocation of financial capital, right, like, like you sort of say, you to your point, like, Is it easier now to get wealthy by building up a business and investing in the business over time? And eventually, you know, getting cash flow from that and eventually selling it? Or is it easier today to just leverage as much as you can get the biggest mortgage, you can't buy the biggest house? You can? And you get to ride that tax free? Right? I mean, like I said, the average person made $180,000, just sitting on their house doing nothing for the last year, how many business owners can say and that's tax free, right. And so when you go through these booms, not only do you end up with a misallocation of financial capital, but human capital as well, right, like how many people that would have been in these sort of STEM fields are out there trying to, you know, create things that actually make our lives better, or instead out there flipping homes? Like I don't know, I don't know, but it's not zero, right. Like that is definitely happening to some extent. So it's just not good for the long term. But but but, you know, the question is always, When is that going to matter? And the point that I would make is, it's not going to matter this year, I, you know, you look at the numbers, and housing is just still so tight. Right. Like I said, the consumer is in better shape than they were going into the recession. And so this is gonna be a story for another year. But but we haven't seen the end of that story. Right. This still is gonna matter at some point in Canada.

Preet Banerjee:

You mentioned something that I have a question about, and that is realtor commissions and other other costs. But specifically, with the the run up in prices, is there not enough competition? I mean, have you seen Commission's like the rates have dropped at all? Or? Or are they relatively static given all this housing activity?

Ben Rabidoux:

That's a great question. I don't have as much clean insight into that. That'd be a good question for one of the guys in the space that are sort of an honest, transparent operator, john Pacelle, us are one of those guys. I haven't seen that there's nothing that jumps out. What I would say is, the realtor profession still continues to attract a pile of people. It's still growing in Canada, even as home sales are rising. And so I I feel like it's still a very competitive market. And I suspect that when you look at how many realtors are and I'd have to look at, I'm going to block my numbers again. But I was looking at this not too long ago. I mean, it was funny I was looking at, there was this article that came out in the US where they were like, Oh my god, there's more houses, or sorry, there's more realtors in their homes for sale in the US. Isn't that crazy? It was like there was you know, 1.2 realtors for every one house for sale. And I looked at Toronto. And the numbers were like, there were like seven or eight realtors for every house for sale. Like it wasn't even close. So I messaged I, you know, I started tweeted back at some of these guys that were talking about it. And they were just like, Oh, my God, that's great. So I feel like it's still one of those things where, you know, the top 10% of realtors are still making the vast majority of the money and you've got a long tail of people that are sort of in the business trying to get going. And you know, it's quite competitive to get in there. But to be honest,

Preet Banerjee:

I don't know. Do you think that anyone needs to intervene in the housing market?

Ben Rabidoux:

Well, there's a great question there. So should they? Yes, yes. But will they know? Right? Well, let's think about I just said how important the economy is for the housing market is for the economy, we're heading into what's likely going to be an election year are not heading into we're in an election year, probably later in the fall. No one's gonna step on housing right before an election, especially with the economy's still relatively fragile. But you give a government majority and yet if prices are still crazy like this, yeah, all bets are off right now. What should they do? Well, I think there's, there's certain low hanging fruit that just makes sense, right? So rollout of a national beneficial ownership registry, we should know if it's a numbered company buying a bunch of residential homes. Who owns that? Is it a foreign national? Is it is it someone here? What like we should be able to know that right. So that one makes sense. I do think the the move to sort of curb foreign speculation makes a lot of sense. Hard to know how much that really moves the needle, but but to some extent, that makes sense. Seeing more municipalities sort of try to curb some of the short term rentals could make sense and try to bring some supply back into the market. There's lots of sort of little things. There's no silver bullet, but there's a lot of small things that are like Well, that's a no brainer. Like why don't we crackdown on corruption and money laundering. In all this, like, that's just like, why wouldn't you do that? Right? And so, you know, my approach is just start with the things that make sense and that are easy and that are sort of not hard to argue.

Preet Banerjee:

And and go from there, with the blind bidding process be something that you would say that needs to go? Or do you think that it

Ben Rabidoux:

will bills? Yeah, no, I think that will go. I think it's got support from real, I think most people in the industry recognize that it's a little bit silly. Now, I want to be clear. And so just so your listeners understand the blind bidding process is just that, you know, you're competing on these bids on this house, you don't you may know how many other bidders are there? Is he ever other registered or at least in Ontario and BC and other places you don't, you don't even know how many people you're up against. But in Ontario, at least you got a registered bid. And so you might know, came up against seven other bidders. But you have no idea what they're actually bidding, right. And so you end up with these wild cases. And I hear this from realtor contacts. And like firsthand stories are like, yeah, we had this house for sale, the bids were clustered in around the kind of, you know, whatever, 1.1 million mark, and then all of a sudden one bid comes in at like 1.4. It's like $300,000 above the next bid. And that's insane. And then all of a sudden that one bid creates the comps for everything else in the area. That makes no sense. And and there's no reason why we can't have just an automatic escalation clause in Canada, or some version. And I know it gets tricky, because you know, there's more to an offer than just the price. Sometimes the closing matters, sometimes the offer, and you know that the conditions matter. But it seems to me the more transparency is good, but I do want to caution that's not a silver bullet, we can look at places like Australia, where they have literally you stand outside and this guy with a gavel and you bid, right like like an auction. Right? But it's, it's, it's as transparent as you can get, and their housing market is insane. So I don't think that this is like, you know, we implement this one thing and all everything is fixed rent, we still need a lot more of single family supply. That's, that's ultimately what's going to be needed to bring some balance to the market.

Preet Banerjee:

Alright, you know, I'm going to wrap it up there because you shared so much information that I'm sure a lot of people's heads are spinning already. So I do want to spend some time talking about your new venture because I think there's a lot of people who would find value in this. So of course, you had your you still have North COVID visors, which is providing research to institutional clients. But now you've launched this new company called edge realty analytics. So tell me about why you started this company and what it does.

Ben Rabidoux:

Yeah, thanks for asking. So edge realty analytics. It's taking the same general research approach as North Cove advisors, but it's distilling it down to, to suppose to create a product that's specifically for Canadian real estate professionals. And so we're targeting mortgage brokers, realtors, developers, anyone that's sort of associated with that industry appraisers, insolvency trustees, whoever it might be. And the idea here is just to try to keep them as smart as possible. And ahead of the competition. And my belief is, you know, we're targeting kind of the top 1% producers we want the smartest people, the people that appreciate being really well informed. And so what we're doing is it's, it's, it's a twice a month publication, we do a metro level deep dive of all the latest trends for select metros, and Canada. And we do the edge report, which is just kind of stuff we're talking about here, all the latest sort of high frequency relevant economic data and some projections looking forward. But what I'm really excited about is, we're also going to be gathering baseline information from subscribers, right? And so we're gonna have surveys that go out with these reports. And we just want to know from, let's say, mortgage brokers, what's happening, the financing conditions from realtors, hey, what's happening with foot traffic through open houses, right, these types of questions, and it's going to allow us to create some baseline data that then feeds back into my North Coast clients that they value, but that will also be available to the edge edge analytics clients. And so I think that that's going to be a trend, you'll be able to know like, well, what are mortgage brokers in Alberta saying, What are realtors in Ontario saying and what you know, and so it's gonna be some interesting data that comes out of that. And the last thing that we do is we do create some infographics that take some of these important concepts, put them in an interesting format that then become sort of shareable by these real estate professionals, to just kind of get some conversation going with their clients and prospects. And so that's all available, people can check it out edge analytics.ca, you can sign up, it's very easy to cancel and fire us if you're not if you're not fired up for what we're doing. But it's, it's all on there.

Preet Banerjee:

I you know, I love that idea of getting, you know, survey feedback from the people who are on the ground, you know, you're in the thick of these transactions. I think that's absolutely brilliant. And sounds like it would be a very valuable product for anyone in that industry. And I can say that, having talked to you over the years seeing your research over the years, it's absolutely top notch Ben So good luck with that endeavor. Yeah, let's give people information on where they would go to to find out more.

Ben Rabidoux:

Sure it's edge analytics.ca. And you can get Have a look around there. So you can sign up there, you'll be added to a just email distribution. So you get notified when new reports are written. But there are archive reports already online. We've got some infographics already live the the survey data is going to take a little while we need to kind of build up some some base data but but those check those interactive, user friendly graphs and and the raw data will be available once we sort of have a few months worth of, of information. So so all those things happening. Dan, your national treasure, I'm gonna put all those links in the show notes. So if anyone wants more information on Ben on any of his services, check out the show notes. It'll have all the links there. Ben, thank

Preet Banerjee:

you so much as always for being a guest on the show. Thanks for having me. It's good to get to chat again. If you want more personal finance content, or you have questions for me, or topic suggestions for the podcast, you can follow me on Twitter or Instagram and ask away. It's the same handle in both cases at Preet Banerjee, I also have two YouTube channels, you can subscribe to my main channel which covers personal finance and investing topics that are global in scope, and a Canadian specific channel as well. And that is it for this episode. thank you as always for listening