Editor's Note: Below is a brief excerpt from the second edition of our Hedgeye Canada Tracker research product. Spearheaded by Josh Steiner, the goal is to help investors understand the trends and spot inflection points in the Canadian housing market by tracking 10-12 different housing data series across Canada and 8 different series at the metro level in Toronto, Vancouver, Calgary and Montreal, and presenting them in a hyper-simple format. Email firstname.lastname@example.org for more info and how you can subscribe.
As Steiner writes:
“We track Chinese FX reserves as a proxy for foreign real estate demand. The view is that $2.75 Trillion is the threshold above which China needs to maintain its FX Reserves in order to prevent a disorderly devaluation of the Yuan. As those FX reserves converge on that threshold, the pace of money leaving the country -- our proxy for foreign real estate demand -- will slow out of necessity as China clamps further down on loopholes and avoidance of the $50,000/per person/per year limit.”
Why does this matter?
According to recently released Canadian economic data for the month of May, real estate has emerged as the third largest component of the Canadian economy, accounting for half of all GDP growth.
As such, housing sector weakness could negatively impact growth.
And it’s happening. “Vancouver home sales put up a massive deterioration, as the bottom dropped out of the Y/Y growth rate,” Steiner writes. “The Y/Y rate went from +0.6% in June to -18.9% in July. Importantly, this decline occurred even before the August implementation of a 15% foreign buyer tax, which should further drag down sales.”