Macro Market Overview
In our 2024 macroeconomic overview, we delve into the current state and recent trends of the U.S. and Canadian economies, highlighting key developments in inflation rates, the labor market, and the housing sector. Despite anticipations of interest rate cuts, the U.S. Federal Reserve has postponed such adjustments amidst ongoing economic expansion, while Canada faces heightened inflationary pressures due to a population surge and tightening rental market conditions.
U.S. Economic Overview
The first quarter of 2024 presented a complex macroeconomic environment. In the United States, despite high hopes for monetary policy easing, sustained economic vitality and inflationary pressures have led to a postponement of the anticipated interest rate cuts.
Inflation and Price Dynamics
Consumer Price Index (CPI): In February 2024, the year-over-year (YoY) growth rate in the United States was 3.2%, slightly above the forecast of 3.1%. The month-over-month (MoM) CPI increased by 0.4%, following a 0.3% rise in January.
Core CPI: Excluding the volatile food and energy prices, the core CPI rose by 3.8% year-over-year and 0.4% month-over-month, exceeding expectations.
Producer Price Index (PPI): The PPI in February increased by 1.6% year-over-year, surpassing the expected 1.2%, and rose by 0.6% month-over-month, doubling the anticipated growth rate.
Specific Sectors: Notable monthly changes include a 3.8% rebound in gasoline prices and a steady rise in housing and rental costs, reflecting underlying economic strength.
Labor Market
Employment Growth: The United States added 275,000 jobs in February, an increase from January's 229,000, indicating a robust employment environment.
Unemployment Rate: The unemployment rate in February saw a slight increase, rising to 3.9% from January's 3.7%, still signaling a tight labor market.
Annual Price Changes for U.S. Consumers
Released on March 12, 2024
Source: Bureau of Labor Statistics,
Canadian Economic Overview
Canada is grappling with the challenges of rapid population growth and rising housing costs, factors that are fueling inflation and impacting the broader economy. As both nations navigate these economic waters, vigilant monitoring and agile policy responses are essential to maintaining stability and fostering growth.
Growth and Inflation
GDP Trends: Canada's per capita GDP continues to decline, indicating that economic growth is not keeping pace with population expansion.
Inflation Trends: In January 2024, the inflation rate dropped to 2.9%, while housing-related expenses increased by 6.2% year-over-year. Mortgage costs surged by 27.4% year-over-year, significantly impacting the overall inflation figures.
Housing Market Dynamics
Rental Market: The year-over-year increase in CPI rents by 7.9% underscores the pressures in the housing sector, closely linked to the nation's population growth.
Inflation (excluding housing) is nearing the target.
Overview of the Canadian Real Estate Market
In the ever-evolving landscape of the Canadian real estate market, the interplay of supply and demand fundamentally drives price dynamics. This report delves into recent trends and shifts within the market, focusing on sales, listings, and price adjustments influenced by key factors such as population growth, income, borrowing costs, and material and labor costs.
Residential Sales Activity
From the second quarter of 2020 to the first quarter of 2021, the Canadian real estate market experienced a significant surge in residential sales activity. This period was characterized by low interest rates and increased housing demand. However, from April 2021 to July 2022, as the benchmark interest rate rose from 0.25% to 2.5%, with widespread anticipation of continued rate hikes, a shift in market trends occurred. This period marked the beginning of a cooling phase, with reduced sales activity due to increased borrowing costs and the market's adjustment to higher interest rates.
Residential Sales Activity
Residential New Listings
Initially, as the market balanced and interest rates rose, the number of new home listings began to increase as sellers aimed to capitalize on the market conditions. However, by January 2024, following a period of stable interest rates and growing anticipation of rate cuts, there was a noticeable decline in new listings. This reduction is attributed to sellers holding off on listing their properties in anticipation of a market rebound, influenced by expected monetary policy adjustments.
Residential New Listings
Residential Prices
The trajectory of residential prices is closely tied to the broader economic and interest rate environment. Initially, lower interest rates stimulated demand, driving prices up due to intense competition for housing. As the Bank of Canada raised rates, increased borrowing costs tempered demand, leading to price stabilization. By January 2024, anticipated rate cuts slightly boosted demand, resulting in modest price adjustments, as reflected in the national year-over-year growth figures. This illustrates the market's responsiveness to changes in the economic and interest rate landscape.
Residential Prices
Provincial Average Residential Price Changes
The impact of the aforementioned factors on residential prices varies across provinces, highlighting regional disparities within the Canadian real estate market:
British Columbia (BC): Witnessed a notable annual price increase of 10.5%, driven by specific local market conditions and strong demand outstripping supply.
Alberta (AB): Experienced a more pronounced annual price growth exceeding 12%, influenced by unique provincial economic factors, affordability, and demand.
New Brunswick and Nova Scotia: These provinces saw price increases primarily due to their relative affordability, attracting buyers into a market that adapts to national economic signals and local demand dynamics.
Provincial Average Residential Price Changes
Canadian Housing Trends
The current Canadian real estate market is undergoing significant transformations, influenced by demographic trends, government policies, interest rate fluctuations, and affordability challenges. This analysis dissects the primary factors affecting housing demand and supply, offering deep insights into the complex dynamics at play.
Impact of Demographic Factors on Housing Demand
Surge in Immigration: Canada has seen a dramatic increase in immigration, welcoming 1,065,229 new immigrants in 2022, with projections for 2023 reaching 1,206,528, significantly above the 2000-2021 average of 408,606. The federal immigration level plan aims to stabilize new permanent residents at 500,000 annually by 2026. Alberta has become the preferred destination for interprovincial migration, while British Columbia and Ontario have experienced net population outflows.
Building Permits in December 2023
Impact of Economic and Policy Factors on Housing Supply
Construction Challenges: Adjustments in inflation and rising interest rates by the Bank of Canada have led to a slowdown in construction activity. Developers are exercising caution due to increased costs, labor shortages, and market uncertainties, resulting in a 7% year-over-year decline in housing starts in 2023.
Supply Constraints: The Canada Mortgage and Housing Corporation (CMHC) estimates that an additional 3.5 million homes are needed by 2030 to address affordability issues. While Ontario has seen a reduction in its regional supply gap, Quebec, Alberta, and British Columbia have experienced an increase in their gaps.
Projected Supply Gap by 2030
Housing Affordability Crisis and Government Responses
Affordability Crisis: Across Canada, affordability challenges are intensifying due to strong population growth and slow supply increases. This is particularly evident in the housing shortage, with the Canada Mortgage and Housing Corporation (CMHC) forecasting a significant need for construction to meet future demands.
Government Initiatives: In response to these challenges, the Canadian government has implemented measures to control temporary population growth by limiting the issuance of international student visas. This approach recognizes the direct impact of population growth on housing demand and the subsequent rise in living costs, which are factors driving inflation.
Exploring Investment Trends in the Multi-Family Housing Market
Exploring Investment Trends in the Multi-Family Housing Market
The Canadian housing market is at a pivotal moment, with changing economic conditions and affordability issues presenting both challenges and opportunities. This analysis is divided into two main sections:
Shift Towards Multi-Family Housing to Address Challenges
Government Housing Action Plan to Stimulate Supply
Significant Shift Towards Multi-Family Housing
Affordability Crisis: The surge in home prices during the pandemic, followed by rising interest rates, has significantly hindered many Canadians' path to homeownership, leading to a sharp decline in housing affordability.
Tight Rental Market, Surging Rents: With demand far outstripping supply, Canada's rental vacancy rate has hit a new low, dropping to 1.5% in 2023 from 3.1% in 2020 and 2021. This scarcity is particularly pronounced in Calgary and Edmonton, where rent increases and vacancy rate declines have been most significant.
Average Rent and Vacancy Rates in the Canadian Rental Market
Multifamily Construction Index and Increase in Rental Supply
Sentiment Among Multifamily Home Builders: The Canadian Home Builders' Association (CHBA) Multifamily Home Building Market Index (HMI) fell to 29.1 in the fourth quarter of 2023, reflecting builders' concerns over high interest rates and the broad challenges facing the industry. This sentiment is particularly negative in Ontario and British Columbia.
Rent Growth: The average rent for two-bedroom dedicated rental apartments saw a significant increase of 8.0% between October 2022 and October 2023, far outpacing inflation and wage growth. This trend was consistent across most markets, with the sharpest acceleration observed in Calgary, Edmonton, Toronto, Montreal, and Vancouver.
Surge in Rental Costs: Since February 2022, when the Bank of Canada began raising interest rates, the average asking rent in Canada has increased by 21%, equivalent to an additional CAD 384 per month. This highlights a significant rise in the cost of living for renters.
Rent Growth by Property Type and Region
Housing Action Plan to Accelerate Housing Supply
The Canadian government has introduced several policy measures to address the imbalance between supply and demand and the urgent need for more affordable housing. These initiatives aim to expedite housing development:
Increased Financing for Apartment Construction: Starting in 2025-2026, an additional CAD 15 billion will be allocated to the construction of rental apartments, accelerating the development of rental housing.
Building More Affordable Housing: Over the next three years, CAD 1 billion in additional funding will be injected to support the construction of more affordable housing units. This funding is aimed at helping non-profit organizations build over 7,000 new homes by 2028.
Tax Incentives for Rental Housing: The government plans to remove the Goods and Services Tax (GST) on newly built rental housing to provide financial incentives and increase the supply of rental units.
Exploring Office Market Trends
Canada’s office market is undergoing significant transformations, influenced by structural changes and cyclical economic patterns. This analysis delves into these shifts, offering insights into investment opportunities and highlighting areas of potential growth in the industry.
Structural Changes Impacting the Office Market
Digital Transformation and Remote Work: Over the past two decades, digitalization and remote work have led to a significant reduction in demand for physical office spaces. This trend was accelerated by the COVID-19 pandemic, driving the widespread adoption of remote and hybrid work models.
The Growing Adoption of Hybrid Work Models
Shift in Work Arrangements:
The prevalence of fully remote work arrangements is decreasing, while hybrid models are experiencing significant growth. Despite the shift toward remote work, Canada’s growing population and employment expansion indicate that the demand for office spaces is evolving, taking on new forms.
Cyclical Changes and Market Impacts
Timing Mismatches:
The office building market faces challenges due to economic cycles, offering opportunities for discounted investments and value-add strategies during economic downturns. Historically, office building construction has been closely tied to economic growth, with developers initiating new projects based on positive economic indicators.
National Office Building Inventory Under Construction (Million Square Feet)
Supply-Demand Mismatch: Office building construction typically takes 3-5 years to complete. When structural adjustments occur during this period, it can result in a mismatch between supply and demand. This has led to negative net absorption and rising vacancy rates in recent years.
National Office Supply and Demand Overview
Regional Insights and Future Opportunities
Vancouver and Toronto: These cities have experienced significant negative absorption rates. Vancouver showed signs of recovery in Q4 2023. Toronto accounts for more than half of the office construction projects nationwide, but the total area has decreased, indicating a downward trend in development.
Investment Opportunities: Among the projects under construction and awaiting delivery, 70% of the office space expected to be completed in 2024 has already been pre-leased. With the growth of Canada's population and workforce, the demand for office space is expected to increase, especially in major cities in Alberta. Investors should focus on Class A office buildings in Alberta's city centers, where vacancy rates are lower and the potential for appreciation is significant.
National Vacancy Rates by Category - Class A vs. Class B
Exploring Industrial Market Trends
The industrial real estate sector experienced notable changes in 2023, reflected in shifts in availability rates, net absorption, and projects under construction. These trends offer insights into the current state of the market and future investment considerations.
Supply and Availability Dynamics
Increased Availability: In Q4 2023, the national industrial real estate availability rate in Canada rose by 0.7 percentage points to 3.2%, a level reminiscent of the pre-pandemic era. This increase was observed across all major Canadian markets, indicating a significant shift in the supply landscape.
Adjustment in Projects Under Construction: The pace of new construction has slowed, with fewer project launches and reduced completion rates for ongoing developments. This adjustment contributes to market normalization following a period of heightened activity.
National Projects Under Construction (MSF)
Regional Perspective: By the end of 2023, Toronto accounted for 57.7% of new industrial project starts. Overall construction activity slowed to 1.7% of the total existing inventory. In most markets, construction volumes remained below 3.0% of current inventory, with the exceptions of Halifax and Vancouver.
Market-Driven Construction Projects
Demand and Absorption Trends
Decline in Net Absorption: 2023 witnessed the lowest level of net absorption since 2009, primarily due to supply growth surpassing demand. This shift signifies a cooling period following the strong growth in e-commerce, local logistics, and domestic production during the pandemic.
National Industrial Supply and Demand Overview
Pre-Leasing Rate: In Q4 2023, the pre-leasing commitment rate for projects under construction was 40.0%, indicating moderate pre-leasing activity under the current market dynamics.
Rent Growth and Sales Prices
Slowing Rent Growth: The national average rent growth rate year-over-year slowed to 6.1%, aligning with levels seen between 2014 and 2016, signaling a stabilization in rental price growth.
National Average Asking Net Rent Growth
National Rent Growth Rate
Stable Sale Prices: The sale prices of industrial properties remained stable in 2023, reflecting the market's adjustment to the new balance of supply and demand.
National Average Asking Sale Price Growth
Asking Sale Price Growth by Market
Investment Prospects and Strategies
Recent trends in the industrial real estate market indicate a gradual return to pre-pandemic normalcy, with supply being absorbed and a lack of significant new demand drivers. While the past two years created favorable conditions for a "buy-and-hold" strategy, the current market dynamics—characterized by high cyclical prices and the absence of clear demand drivers—advise caution for new entrants.
U.S. Real Estate Market Dynamics
The U.S. real estate market is currently undergoing significant shifts driven by rising mortgage costs and changes in affordability. These factors are critically shaping supply-demand dynamics, directly impacting sales volumes and property prices.
Rising Mortgage Costs and Declining Affordability
One of the primary challenges facing potential homebuyers in the U.S. is the increasing cost of mortgages. With typical U.S. mortgage rates locked in for 30 years, the current high rates place a heavy financial burden on borrowers, making new loans or home purchases less affordable for many Americans. This situation has led to suppressed demand, reduced transaction volumes, and falling home prices.
The average level of 30-year fixed-rate mortgages in the U.S.
Historical Context and Market Behavior
From 2019 to approximately 2022, the housing market experienced high transaction volumes driven by a low-interest-rate environment, reflecting strong demand for homes. During this period, the low number of listings indicated that market inventory was steadily being absorbed. However, as interest rates began to rise, homebuying demand significantly decreased. This shift underscores the housing market's sensitivity to interest rate fluctuations and highlights the critical role of affordability in sustaining demand.
Number of Active Listings in the U.S.
Impact on the Housing Market
Supply and Demand Dynamics: High current interest rates have restricted demand, leading to inventory build-up and a shift toward a buyer's market in many regions.
Price Adjustments: With demand suppressed by affordability concerns, sellers may need to adjust their price expectations, potentially resulting in market corrections in certain areas.
Market Recovery: Anticipated interest rate reductions in the second half of 2024 could stimulate a recovery in the housing market, encouraging delayed buyers to enter the market and gradually restoring transaction volumes and price stability.
Existing Home Sales in the United States
Housing Affordability Issues in the United States
The U.S. real estate market in 2023 highlighted a critical challenge: housing affordability. Only 16% of homes on the market were affordable for a typical American household. This immense pressure on the market has significantly impacted potential buyers, underscoring the urgent need for large-scale policy interventions and market adjustments.
Affordability Crisis
A home is considered affordable if the estimated mortgage payment does not exceed 30% of the local average monthly income. By this standard, the vast majority of homes in the 2023 market were beyond the purchasing power of ordinary Americans. This stark affordability gap is partly attributed to high mortgage rates, which not only inflate home prices but also impose additional financial burdens on homeowners.
Share of Median-Income Affordable Homes in the Housing Market
Historical Background and Current Challenges
Since the 2008 housing market crash, a significant shortfall in new home construction has resulted in a deficit of millions of housing units, disproportionately affecting low-income families. This persistent lack of supply is a key factor in the current affordable housing crisis, further exacerbated by high mortgage interest rates.
U.S. Housing Starts from 1959 to 2024
Population Growth and Market Dynamics
Unlike Canada, which is experiencing a surge in population growth, the United States has a population growth rate of approximately 0.5% per year. This steady growth rate should theoretically benefit the stability of the real estate market, providing a consistent demand for housing. However, the lack of supply and issues related to affordable housing pose significant challenges to leveraging this stability for fostering broader market health.
The U.S. Population Has Grown at a Constant Rate (from 1950 to 2024)
Policy Responses and Future Directions
Governments at all levels are making efforts to address these challenges:
Adjusting Zoning Laws: An increasing number of cities and states are relaxing zoning regulations to encourage construction, aiming to increase the supply of affordable housing. While this is a step in the right direction, achieving a balance between supply and demand is expected to take years.
Supporting Low-Income Families: Programs by the U.S. Department of Housing and Urban Development (HUD) provide crucial assistance by subsidizing rent for low-income families through direct payments to landlords. Typically, local housing authorities supported by HUD cover about 70% of the rent, while tenants are responsible for the remaining 30%.
The Rise of the U.S. Sunbelt States
The Sunbelt states, spanning the southern and western regions of the United States, are experiencing a population surge driven by economic growth, lower living costs, and favorable tax policies. This migration trend is reshaping the demographic landscape of the U.S., particularly benefiting states like Texas and Georgia.
Reasons for Migration to Sunbelt States
Economic Opportunities: Sunbelt cities are experiencing robust economic growth, particularly in industries like technology. The presence of companies such as Texas Instruments and Dell has strengthened the job market, making these areas attractive to professionals seeking employment and business expansion.
Cost of Living: Many Sunbelt states, such as Texas, have a cost of living below the national average, with housing costs significantly lower than coastal gateway cities. This affordability is a key factor in attracting new residents, particularly as they reach critical life milestones, such as marriage and starting a family.
Tax Incentives: Compared to northern states, Sunbelt states typically offer more favorable tax environments. For example, Texas has no state income tax and provides incentives like the Texas Enterprise Fund (TEF) to encourage capital investment and job creation.
Quality of Life: Lower taxes, affordable housing, and a pro-business culture contribute to an enhanced quality of life, making these states attractive to individuals and businesses alike. Reduced state and local tax (SALT) burdens and mortgage deductions are particularly appealing to residents relocating from high-cost states.
Sunbelt States
Economic and Real Estate Market Impacts
Influx of Businesses and Professionals: The migration of companies and professionals to Sunbelt states has driven increases in employment, GDP, and wage growth, significantly outpacing national averages. Investments in industries such as electric vehicles and semiconductor manufacturing have further boosted local economic growth.
Real Estate Market Dynamics: While housing prices in the Sunbelt states are relatively low and more affordable compared to gateway cities, increasing demand has led to rising home and apartment rental prices. Nevertheless, these regions remain attractive, drawing a large influx of new residents.
Demographic Shifts: Top cities experiencing growth in office-based employment include Austin, Orlando, Dallas, Houston, Raleigh, Fort Worth, Phoenix, Las Vegas, Tampa, West Palm Beach, Jacksonville, and Charlotte. These cities are at the forefront of demographic changes and benefit significantly from migration trends.
Impact of Interest Rates on Cap Rates and Asset Values
Understanding the relationship between interest rates, cap rates, and real estate asset values is crucial for real estate investment strategies and market behavior. This analysis explores the chain of effects triggered by changes in interest rates, shedding light on their broader market implications.
Decline in Interest Rates and Financing Costs
Lower Borrowing Costs: A decrease in market interest rates reduces borrowing costs, making it cheaper to finance real estate purchases. This enhances the attractiveness of real estate investments, as affordable borrowing encourages investors to enter the market and achieve higher returns.
Increased Investment Demand:
Increased Real Estate Demand: The reduction in financing costs attracts more investors to the real estate market, as they aim to leverage the low-interest-rate environment for investments. This surge in investor activity drives up demand for real estate properties.
Rise in Real Estate Values:
Market Price Appreciation: Increased demand drives up real estate prices. According to the principle of supply and demand, higher demand and increased transaction volumes will elevate the market value of properties.
Decline in Cap Rates
Capitalization Rate Dynamics: The capitalization rate (cap rate) is the ratio of net operating income (NOI) to the market value of a property. When the market value of a property increases, assuming the NOI remains relatively stable, the cap rate will decrease. This is because the cap rate is inversely related to the market value of a property; as property values rise, cap rates tend to decline.
Summary of the Logical Chain
From declining interest rates to decreasing cap rates:
"Interest rate decline → Lower borrowing costs → Increased investment demand → Higher real estate market values → Lower cap rates."
This chain of events underscores how changes in interest rates significantly influence the real estate investment landscape, impacting everything from individual investment decisions to broader market dynamics.
RISK DISCLOSURE
Investing in securities and other financial products involves a variety of risks that may result in partial or total loss of principal. The strategies and market insights discussed herein are subject to, among others, the following risks:
Market Risk: The value of securities can fluctuate daily due to economic, political, and market-specific factors. There is no assurance that any investment strategy will achieve its stated objectives.
Liquidity Risk: Some investments may be less liquid than others or illiquid, meaning they might be difficult to sell within a reasonable timeframe, or without significantly impacting their price, potentially preventing a sale at or near their stated value.
Capital at Risk: Some investments may include a high degree of risk, including the possibility of total capital loss. Investors may not recover the initial amount invested, and past performance is not indicative for future returns, as actual outcomes may differ materially from historical results.
Credit and Counterparty Risk: The possibility exists that issuers or counterparties may fail to meet their financial obligations.
Currency and Political Risk: Investments in foreign markets may be adversely affected by fluctuations in currency exchange rates, changes in governmental policies, or political instability.
Concentration Risk: Non-diversified portfolios, or those concentrated in a specific sector or asset class, may experience higher volatility if conditions affecting that area deteriorate.
Derivatives and Leverage: The use of derivative instruments or leverage can amplify both gains and losses, and may introduce additional risks including valuation, correlation, and counterparty risks.
ESG and Impact Investing Considerations: Strategies that incorporate Environmental, Social, and Governance (ESG) or impact investing factors may underperform relative to broader market benchmarks if market sentiment shifts against the favored sectors or themes.
Lack of Information or Operating History: Investments in exempt securities with limited operating histories or information may carry additional risk, as there may be insufficient data to assess the stability, performance, or management track record. The absence of a proven history increases the uncertainty and potential for unforeseen challenges.
Investors should be aware that these and other risks can cause investment results to vary significantly from the objectives set forth in this publication. No assurance is given that any investment strategy or market insight will be successful, and all investments carry inherent risks, including the potential loss of principal.
IMPORTANT NOTICE
The views and opinions expressed herein are solely those of the author(s) as of the publication date and do not necessarily reflect the views of Enoch Wealth Inc. or its affiliates. This material is not intended for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to applicable laws or regulations. Recipients of this material should ensure that they comply with all relevant local legal and regulatory requirements.
Before acting on any information contained in this publication, readers should consider their own financial situation and risk tolerance and seek independent professional advice as necessary.
DISCLAIMER
The information contained herein is for general informational and educational purposes only and does not constitute an offer, solicitation, or recommendation to buy or sell any securities or financial products. The market insights, opinions, and analyses expressed in this publication are those of the author(s) as of the date of publication and are subject to change without notice. They are not intended to be, and should not be construed as, personalized investment advice or a substitute for professional advice tailored to your specific financial circumstances. Neither Enoch Wealth Inc. nor its affiliates shall have any liability or obligation to any party for any loss or damage arising directly or indirectly from the use of, or reliance on, the information provided herein.
Investors are advised to perform their own due diligence and consult with an independent financial advisor, accountant, or attorney before making any investment decisions. Past performance is not indicative of future results, and no representation is being made that any account will or is likely to achieve profits or losses similar to those reported.