Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The BMO economics department is virtually alone in arguing against the thesis that Canada’s housing affordability crisis is primarily caused by a shortage of new homes,
“A well-respected columnist opines in today’s Globe that ‘the supply of housing has slowed to a trickle’ —a trickle, I say. As proof, out wheels the old canard that “adjusting for population, the rate of housing starts is a third less than it was in the 1960s and 1970s (600 per 100,000 population versus 900).” First, note that said “trickle” saw the most Canadian housing starts in a two-year period on record in 2021/22, and there are a record 340,000 units now under construction. Second, the starts-to-population comparison commits the fatal and basic flaw of comparing a stock (population level) to a flow (housing starts). The apt comparison for starts is the flow of new household formation (i.e., related to the change in the population, not the level). But, playing along, note that Canada’s supposedly low current ratio (of 672 starts per 100,000 people last year) is, in fact, in line with the long-run mean, and is well above the comparable U.S. measure of 465. In fact, U.S. housing starts have been consistently far below Canada for 20 years on this metric, and yet somehow Canada still has much, much higher home prices than stateside. The one recent occasion U.S. starts approached current Canadian levels (in 2005) a home price crash ensued. Should we be aiming higher on homebuilding? Absolutely, especially when population growth is booming at 3 per cent year-over-year. But please don’t use the level of population to ‘prove it.’”
“It’s not that we have too many people. It’s that we have too few houses” - Andrew Coyne, The Globe and Mail
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Bernstein analyst Bob Brackett published a 72-page primer on the copper industry and uncovered both more demand and more supply,
“The rising demand and peaking supply results in an unbalanced market, with a supply deficit opening up after 2027. Even if more than 50 per cent of probable and possible projects are sanctioned and go to market quickly (extremely unlikely), a deficit will open up from 2030. The supply deficit could be exacerbated by geopolitics as the concentration of copper production is relatively high, with the top 3 producers (Chile, Peru and the DRC) accounting for 46 per cent of mined supply in 2022. In reality, this supply gap will never come to be, as (by definition) supply equals demand. There are two ways the supply gap will be avoided (1) demand destruction (we see little risk of this, as substitution is difficult in many areas, and copper is rarely a large cost driver), and (2) new supply additions. These supply additions will be high cost (otherwise they would already be in our model), and will lead to copper price increasing… We update our price deck with our updated analyses, which points to a more compelling bull case on copper. However, the short-term uncertainties around China’s property sector and mid-cycle industry margin compels us to wait for a better entry point”
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The Research Investment Committee (RIC) at BofA Securities believes secular trends will affect portfolio returns in the coming years,
“‘Long term’ risks sometimes intrude upon the present. That’s been the tone of market history since 2019; first, the pandemic & Ukraine invasion, and today: China bans Apple (deglobalization); $1-trillion Treasury interest payments & record 3rd year of losses (debt); record strikes & wage hikes (inequality), and OPEC oil cuts with no SPR relief (scarcity). We expect slower growth, stubborn prices, and the further intrusion of these risks. Investors pulled $30-billion from inflation-friendly assets after big ‘22 inflows , but contrarians should reload. Own credit, commodities, ‘ex-China’ & cash. .. Aging demographics, automatic inflation. Demographics is another ‘long-term’ risk with effects evident now. In an aging society, automatic Social Security raises linked to CPI (6 per cent in ‘22, 9 per cent in ‘23) means more inflation. Retirees will number a record 45% of payroll workers in coming years, greater than any labor union share in history. This union never loses. Sell Treasuries”
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Diversion: “Scientists say you’re looking for alien civilization all wrong” - Wired