Lexicon Financial Group Weekly Update — October 30, 2024
“Everything needs to work at the same time. But what keeps society vibrant permanently is jobs, industry, business, and stuff like that. It pays for everything else. If you just build affordable housing, and those people don’t have jobs, it’ll no longer be affordable soon. So you really have to build around the business community.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Owning a home is the dream for many globally, but it is a relatively new phenomenon in terms of human history. Our nomadic ancestors were continually on the move from one place to the next. The change toward an agrarian society began somewhere between 30,000 BC and 15,000 BC. But it was the industrial revolution that really kicked off the idea of individual home ownership. People were leaving rural settlements and moving to cities to work in factories.
This trend spurred the development of mortgages. Sure, lending practices had been around for almost all of human history, but it was almost always restricted to the trading of goods and services. After the Industrial Revolution, however, global wealth increased to the point where banks began offering "higher-risk" mortgage loans—those made for common people. This allowed individuals to own their own homes and to become landlords themselves if they wanted to. (1)
Global homeownership has increased significantly since the 20th century. However, today, the cost of housing is surging, and the availability of adequate housing is shrinking. According to the United Nations, about 1.6 billion people worldwide lack adequate housing. Experts believe that this number could rise to three billion by 2030. Data from a 2022 International Monetary Fund (IMF) report shows that in most countries, the cost of housing has grown faster than incomes. (2)
The rise in house prices has been attributed to a growing population and changing demographics and has coincided with increased demand for more housing, particularly within city centres where there are better transport links and public services. Richard Florida, founder of the Creative Class Group, contends that part of the reason for the housing crisis is because housing has been financialized and turned into an investment vehicle, which has caused an oversupply of luxury housing and a lack of affordable housing. (3)
According to the 2023 International Housing Affordability Survey by Demographia, three out of the 10 least affordable housing markets are in Australia and New Zealand, two are in Canada and four are in the United States. The least affordable housing market is Hong Kong, where the median house or apartment price is almost 19 times as high as the median annual gross household income. After Hong Kong, New Zealand and Australia were the least affordable countries overall in the study, which looked at the U.S., Canada, the U.K., Hong Kong, Singapore, Australia, New Zealand and Ireland. (4)
Since the commercialization of housing in China in 1998, the real estate sector has witnessed a steady ascent with the help of the Chinese government. During the 2008 global financial crisis, the Chinese government's massive four trillion-yuan (US$586 billion) stimulus package helped fuel a rapid surge in housing prices. Then, as the global COVID-19 pandemic drew to a close, China's population peaked, and the economic growth slowed significantly. Urban housing in China now faces a dual challenge. On the one hand, a sizable portion of new urban residents are unable to afford the exorbitant housing prices; on the other hand, a substantial number of newly constructed commercial residential properties remain unsold. And just like other parts of the world, financialization of land and housing has profoundly reshaped the real estate market in China. It has exacerbated market instability and turned the real estate bubble into a Sword of Damocles hanging over China’s economy where the real estate sector accounts for 27 per cent of GDP. (5)
In spite of the challenges of home ownership, there are programs that can help. The First Home Savings Account (FHSA) is a registered plan that allows Canadians to save for the purchase of their first home. Each year, up to $8,000 can be contributed and there is a corresponding tax deduction for the purposes of calculating income tax. Provided you use the funds for the purchase of a home, the funds are withdrawn tax free.
Before purchasing any property, though, people should understand that:
Buying a home is expensive: Housing prices have skyrocketed, and mortgage interest rates are still steep, which lowers buying power and makes a home purchase today more expensive than it used to be.
Appreciation is not a sure thing: The appreciation in the value of homes in any given location depends a lot on the overall economy of that area. You just have to look at Detroit to see what happens to real estate values when there is economic and social decay.
The cost of being a homeowner can increase: Monthly principal and interest payments can change over time but there are other associated homeownership costs. These include property taxes, maintenance expenses and insurance premiums. All of these generally increase over time. (6)
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Treasury Yields Surge to Highest Level Since July
Two key elections chart the U.S.-Japan alliance’s future
China will ‘significantly’ increase spending to revive economic growth
Looking Back
Last week was not a good week for Canada’s main index, the Toronto Stock Exchange’s S&P/TSX (TSX), as it ended lower for the fifth day in a row last Friday. This deterioration was led by declines in the real estate and consumer discretionary sectors, as investors turned cautious ahead of a potentially volatile period for the market. This despite the Bank of Canada (BoC) cutting interest rates by an unusually large half a percentage point to support the economy last Wednesday. (7)
In the U.S., the S&P 500 Index finished lower after posting gains in each of the six previous weeks. Rising Treasury yields weighed on U.S. stocks last week, but large-cap stocks held up better than small-caps, and growth stocks outperformed value as the tech-heavy Nasdaq Composite Index made a slight gain. Please note that rising bond yields is not out of the norm (see the graph below).
Source: FactSet, Bloomberg and Edward Jones. This chart shows that bond yields in Canada and the U.S. rose initially following the 1995 Fed easing cycle before resuming lower.
All the major markets in Europe ended lower last week. Business activity in the euro area remained in contractionary territory in October. An early estimate of the composite Purchasing Managers’ Index (PMI), which combines activity in the manufacturing and services sectors, registered 49.7 in October, compared with 49.6 in September. PMI readings less than 50 indicate a contraction. France and Germany, the two largest economies, were the main sources of weakness. A number of European Central Bank (ECB) policymakers (including former hawks) raised the possibility of more interest rate cuts before the end of the year, but they seemed to be divided over the pace of rate cuts.
Japan’s stock markets also lost ground last week due to uncertainty about the outcome of the country’s general election on Sunday, October 27. Does this sound familiar or what?
The central bank in China also signaled additional easing measures in the near future as youth unemployment eased in September from a record high the prior month. The jobless rate for 16- to 24-year-olds, excluding students, came in at 17.6 per cent in September which is 1.2 per cent lower than August. (8)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
No Longer Nomads: The History of Real Estate, Andrew Beattie, Investopedia, September 28, 2023
What has caused the global housing crisis - and how can we fix it? Victoria Masterson, World Economic Forum, June 16, 2022
Solving the global housing crisis, Natalie Keffler, World Finance, September 7, 2021
Where It’s Hardest to Afford a Home, Katharina Buchholz, Statista, April 12, 2023
Housing policy and markets in China: Affordability and sustainability, Yuzhe Wu, Zhen Guo and Wei Wang, Journal of Urban Management, September 2, 2024
Seventy-eight percent of Americans think homeownership is part of the American Dream. But is buying a house a good investment? Erik J. Martin and Mia Taylor, Bankrate, June 17, 2024
The close: TSX posts longest daily losing streak since April, The Globe and Mail, October 25, 2024
Global Markets Weekly Update, T. Rowe Price, October 25, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Demographia International Housing Affordability – 2024 Edition
What’s behind Canada’s housing crisis? Experts break down the different factors at play
Why is housing supply so low? Understanding the U.S. housing shortage
4 practical solutions to the world's spiraling housing crisis