The real reason housing got expensive, and why it will get cheaper

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO senior economist Robert Kavcic discussed why housing will become more affordable,

“CMHC is now targeting pre-pandemic levels of affordability as a baseline objective, which is a fairer marker than the early-2000s previously used. The early-2000s saw generationally-cheap housing at the tail end of a near decade-long bear market, and before imposed single-detached supply constraints — an odd benchmark to say the least. What has really changed to destroy affordability in such short order since 2019? The common refrain is a lack of supply, but completions have leveled up by almost 20 per cent from 2019. Granted, not in the segments that Canadian families actually need. Meantime, demand exploded on the back of: 1. Deeply negative real interest rates, which set valuations out of whack with income fundamentals. 2. A surge in population growth to 1.3 million people/year at one point. Both demand-side factors have now been addressed, and the path back to pre-pandemic affordability is underway. We can get there with stable home prices, income growth, a modest further step down in borrowing costs and sturdy completions”

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BofA Securities global commodity research team recently held a virtual conference for 700 institutional clients. Strategist Francisco Blanch summarized the conclusions,

“Most of those attending our conference believed that Brent was more likely to touch $55/bbl before it hit $95/bbl by a margin of 20 per cent, but we also noticed bullish sentiment for copper and gold. Participants also thought that BCOM commodity prices and volatility have yet to peak. Also, a vast majority of participants believed that the USD would likely weaken further going forward, and saw equities outperforming commodities (and bonds) over the next 12 months. In terms of subsectors, a majority of participants believed base and precious metals would outpace natural gas, agriculture, or carbon into 2030. Conference attendees felt oil was the least likely commodity to outperform over the next 5 years, and saw OPEC+ continuing to add crude volumes into the market. From a geopolitical standpoint, the US/China trade war was the biggest concern by a large margin … Deglobalization will likely duplicate many investments locally, decarbonization should be very intensive for metals, and redistribution of income may keep inflation relatively high and sticky. Plus, three of the biggest focuses in geopolitics – defense, energy, and infrastructure – are all very commodity intensive”

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BMO bank analyst Sohrab Movahedi provided an update on balance sheet health,

“OSFI announced that the Domestic Stability Buffer (DSB) will remain at 3.5 per cent (near the upper end of the 0-per-cent to 4-per-cent range) of total risk-weighted-assets (RWA), unchanged from the last announcement on December 17, 2024, at a rate which has been in effect since November 1, 2023. Each of the ‘Big 6’s’ CET1 levels were comfortably above the current regulatory minimum of 11.5 per cent as at Q2/25, with a group consolidated CET1 of 13.7 per cent, ranging from 13.2 per cent at BNS and RY to 14.9 per cent at TD (following SCHW sale). Key Points: The decision to leave the DSB unchanged is predicated on 1) stable but elevated systemic vulnerabilities (elevated household indebtedness, rising mortgage payment renewal risks, condo oversupply concerns, commercial real estate vulnerabilities, and trade and geopolitical uncertainties); 2) relatively low near[1]term risks to bank capital; and 3) the view that banks are well-capitalized and are entering a period of higher uncertainty from a position of strength, enabling them to navigate through this current risk environment”

Mr. Movahedi has “outperform” ratings on Royal Bank of Canada, National Bank of Bank, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Brookfield Corp.

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Bluesky post of the day:

Diversion: “The Blue Screen of Deathb is Dead” – Lifehacker