National Bank’s chief rates and public sector strategist Warren Lovely published a timely research report entitled Canadian housing springs a leak on Wednesday. The report leaves a lot to reader interpretation, with only a brief description followed by more than 20 charts.
After studying the charts, my main takeaway is that housing prices are set for a decline of about 12 per cent on average over the next 20 or so months.
National Bank predicts that insured variable and fixed mortgage rates will climb above the 2019 highs of near 3.75 per cent and 4.25 per cent, respectively, with both reaching 4.5 per cent later this year. The mortgage rate increases so far, caused in part by faster Bank of Canada monetary tightening than previous cycles, have led to a pullback of roughly 5 per cent from the highs for resale homes.
The most important chart in the report is chart 18: How much weakness (and for how long) last time? (I posted a copy on social media here). It shows that during the last Bank of Canada tightening cycle in late 2017 and early 2018, the price of the average resale home dropped 10 per cent until the bottom was reached 21 months rates starting rising.
There are reasons to expect the correction to be larger this time. The current cycle has been frothier, with housing prices climbing 10.4 per cent in comparison to 3.8 per cent and 3.0 per cent for the previous two cycles.
Mr. Lovely also emphasized that variable rate mortgages have climbed to record levels as a percentage of total originations, at roughly 55 per cent. This raises the probability of forced sales and downward pressure on housing prices as mortgage payments bite household finances.
There are also factors that should mitigate the damage in housing markets. The country’s enviable increase in population growth between 2016 and 2021 will continue to support housing demand, as will the steady climb in immigration.
The domestic housing market has always been a catalyst for strong emotions. There have been many pundits warning of a real estate collapse and almost as many arguing that the housing market will rise over any reasonable future time period - if not forever. Despite this drama, the future for housing markets might be a bit boring: a painful but shallow correction followed by price stability and milder gains.
For equity markets, there may be a silver lining as the froth and frenzy departs the real estate markets. Interest may return to stocks as housing looks less bulletproof as an investment option.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Calian Group Ltd. (CGY-T) Ottawa-based Calian is a company that operates four business segments: Health, Advanced Technologies, Information Technology and Cyber Solutions, and Learning. The stock has been a strong outperformer, rallying 14 per cent year-to-date, up until Friday’s close. On May 19, its share price closed at a record high of $71.58. Calian has a unanimous buy recommendation from seven analysts, but as Jennifer Dowty tells us, the share price is vulnerable to a pullback in the near term.
Beyond Meat Inc. (BYND-Q) Three years ago this month, the plant-based meat company went public on the Nasdaq to much fanfare and speculation. Its burgers, sausages and other products designed to look and taste like meat were going to revolutionize the way people eat, disrupt the food industry and cut the environmental impacts associated with meat-heavy diets. Fast forward today, and you’ll see a share price that’s down 90 per cent from the all-time high. What went wrong - and is there now a buying opportunity? Philip MacKellar of The Contra Guys shares his thoughts.
The Rundown
Based on earnings, stocks could have even further to fall
For students of stock market disasters, this is where things get interesting. Up until now, the crash has been largely predictable – a simple but painful demonstration of what happens when inflated stock prices run into the buzz saw of rising interest rates. But this simple story is now growing more complicated. What happens next will depend largely on whether companies can deliver the earnings that investors expect over the months to come. If they can, the market carnage should be mostly over. If they can’t? Brace for more bloodshed ahead. Ian McGugan explains.
Also see: As bear market looms, battered Wall Street seeks elusive ‘Fed put’
David Rosenberg on how to know when it’s time to start buying stocks again
Economist David Rosenberg believes the stock market is far from bottoming. He says the market is following a familiar pattern of a recessionary bear market, and that holds clues on when it will be time to start buying.
Bullish view on TSX tempered as analysts fret about growth
Canada’s main stock index is expected to advance less than previously thought this year as economic growth slows and central banks raise interest rates, a Reuters poll found. Some even expect the outperformance of the S&P/TSX Composite index versus most major global markets to soon come to an end, and struggle to return to record highs anytime soon.
Also see: After rocky period, U.S. stocks will end year up from current levels: poll
What a $225-million Canadian fund manager has been buying and selling as stocks flirt with a bear market
Shane Obata is seeing a lot of buying opportunities in the markets these days as higher-quality stocks are dragged down with riskier names as part of the broader sell-off. Mr. Obata, who manages nearly $225-million in assets as part of the firm’s overall $2.3-billion under management, says his team is primarily a “long-only shop,” meaning it typically uses a “buy and hold” strategy. It has been actively deploying cash and is nearly fully invested following the current market volatility. The Globe recently spoke to Mr. Obata about what he’s been buying and selling.
Battered by bonds and stomped by stocks? Calm your mind with these long-term return projections
Guidelines for financial planners on long-term investment returns, inflation and more are released annually by the FP Canada Standards Council and the Institut québécois de planification financière. This year’s edition is a must-read because of the abnormality of recent returns. As Rob Carrick writes, use these guidelines to set your future expectations for returns over the next 10-plus years.
Also see:
Stock and bond divergence offers hope for battered 60/40 portfolio
Understanding the stock market through the laws of nature
Elon Musk is critical of ESG. Maybe he should take a closer look at Tesla
When S&P Dow Jones Indices removed Tesla Inc. from an influential index of companies based on environmental, social and governance principles, some investors may have scratched their heads in bewilderment last week. The source of their confusion: If a company devoted to making electric vehicles and curbing fossil-fuel emissions can’t gain admission into the S&P 500 ESG Index – but an oil producer like Exxon Mobil Corp. can – what’s the point of embracing sustainability? But David Berman has a thought: Perhaps ESG investing principles are doing exactly what they should be doing.
Is the end of the bitcoin winter nigh?
The crypto winter is into its ninth week and bitcoin can’t shake the chills. From technicals to turnover, market indicators are flashing red or amber for the biggest cryptocurrency, which has lost a third of its value in just two months. So what now? Reuters reports on signs that the crypto king is plotting its comeback.
Equity ETFs for investors nervous about getting burned by stocks
As much as stocks have looked dangerous this year, most investors will still need to have some exposure to them in order to meet their financial goals. Rob Carrick has a suggestion for staying in stocks while moderating the downside risk a little: Consider a low-volatility exchange-traded fund tracking the Canadian, U.S. or international markets.
Others (for subscribers)
As U.S. economy’s exceptionalism fades, so does the dollar
Dividend payouts hit first-quarter record, but outlook rocky
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: CFO invests over $540,000 in this stock with a forecast return of over 60%
Tuesday’s Insider Report: CEO and chairman buy this dividend stock after it falls into oversold territory
Globe Advisor
How to play the bull case for agriculture stocks
How retail stocks went from ‘recessionary playbook’ to market casualty
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Ask Globe Investor
Question: How can I invest in John Heinzl’s model dividend portfolio?
Answer: You can’t. It’s a model portfolio that uses virtual dollars, not real money. If you’re looking for a dividend fund to invest in, there are many ETFs to choose from. You’ll need to open a discount brokerage account to get access to them.
Some worthy examples include the BMO Canadian Dividend ETF (ZDV), iShares Canadian Select Dividend Index ETF (XDV) and Invesco Canadian Dividend Index ETF (PDC), among many others. There are also lots of dividend ETFs that cover the U.S. market, including the iShares Core Dividend Growth ETF (DGRO), which I hold in my model portfolio.
--John Heinzl
What’s up in the days ahead
Dr. George Athanassakos will tell us why his value investing students believe Malibu Boats is a stock with considerable upside.
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Compiled by Globe Investor Staff