Distressed deals pile up in Canada's once-booming housing market

Ari Altstedter, Bloomberg News

Zohal Habibi hadn’t even moved into her new home in the suburbs of Toronto when she started regretting the purchase. “We took a very bad decision,” she says.

It’s not about the house itself. She and her husband are excited about the extra space it’ll give them and their two young kids. The problem is the price they agreed to pay for the three-bedroom home in March: $920,000 (US$711,000).

Not long after, prices started to slide, and quickly. By the time their lender got around to appraising the house in May, it marked the value down to $800,000. A second appraisal a few weeks later was even grimmer -- $740,000.

Legally bound to the deal but no longer able to obtain a big enough loan to go through with it, the couple pleaded with the seller to nudge down the price. On Thursday, they closed at $810,000. “We didn’t know that the market would crash,” Habibi says.

All across greater Toronto, until recently the epicenter of a national housing boom with few peers anywhere, similar tales are piling up. The specifics can vary: from someone who bought a new house before selling their old one and now can’t get as much money as they were counting on, to situations like Habibi’s, where the appraisals that determine the maximum mortgage size come in far below the agreed-to price, to simple cases of buyer’s remorse.

But they all amount to one thing: Sellers must agree to a lower price, fast. That’s contributed to home values in metropolitan Toronto declining at an unusually rapid clip — the average selling price is down nearly 9 per cent in three months. And with the pain now spreading to other parts of Canada, such distress threatens to both accelerate and deepen a housing market decline that’s already underway. On Wednesday, the national benchmark home price posted its second straight monthly decline, with many of the small cities and towns that saw the biggest gains on the way up now correcting fast.

An apartment building in the Parkdale neighborhood of Toronto. Longer-term mortgage rates have climbed swiftly as global bond markets respond to the spike in inflation. Photographer: Cole Burston/Bloomberg

“A lot of the sellers in the market today are effectively distressed sellers,” said John Pasalis, who runs Toronto-based brokerage Realosophy Realty Inc. “This is putting a lot of downward pressure on prices.”

The reason for the market’s sudden turn is the unusually rapid increase in rates. To cool inflation from a 30-year high, the Bank of Canada has raised the benchmark rate from 0.25 per cent to 1.5 per cent since March, and opened the door to lifting it to 2.25 per cent next month. Longer-term mortgage rates have also climbed swiftly. Because the inflation fight is global, similar processes are playing out around the world. In the US, 30-year mortgage rates have nearly doubled in a year, reaching levels not seen since 2008, while in New Zealand houses are failing to sell at auction since the central bank started raising rates.

In Canada, though, the market downturn is starting to develop a momentum of its own, and flashing a warning to policy makers elsewhere trying to use shock therapy to bring their own wild housing markets to heel.

Because the real estate market operates like a food chain — first-time buyers purchase a starter home from someone who uses that money to buy something bigger from another person, who may buy something else in turn — a break in any of those links can cause problems all the way up. When one party can’t close, it can mean their counterparty can’t follow through on another deal, and the ensuing cash crunches can result in either the seller offloading their property fast for whatever they can get, or the buyer, assuming they can't renegotiate like Habibi did, having to borrow money at high interest to cover the shortfall. That’s the scenario that appears to be playing out in some parts of Canada now.

“I’ve seen an influx in cases that are beyond anything anybody’s ever seen,” said Greg Weedon, a Toronto-based real estate lawyer who says 20 files related to buyers unable to fulfill their purchase contracts have hit his desk in just the last two weeks. “I’ve restructured my whole business at this point to exclusively take in files related to buyers in breach. That’s going to be my business model going forward for the foreseeable future.”

Much of the distress playing out in the market today is down to buyers and sellers caught by the rapid turn in prices. Until March, when bidding wars were common in many regions, it made sense to buy before you sold, or make offers that weren’t conditional on bank appraisals and financing coming through. Now that the market is falling, buyers and sellers will likely adjust their strategies, and that will mean fewer people getting into distress in the same ways going forward.

But with the Bank of Canada signaling it’s not done raising rates, the next question will be whether everyone who did manage to close their deals can hold on.

Workers at a condo building under construction in Lasalle, Quebec, Canada. Photographer: Christinne Muschi/Bloomberg

Through the pandemic, variable rate mortgages came to account for more than half of all new home loans as buyers sought the lowest rates they could get to afford the record high prices. Now, about 60 per cent of all the variable rate loans outstanding will see their monthly payments increase alongside the central bank rate, according to research from National Bank of Canada.

And real estate investors, who have come to account for about a fifth of the market, are also often highly leveraged through short-term or floating-rate debt. In its annual review of risks to Canada’s financial system this month, the central bank said such investors could be more likely to sell as their borrowing costs rise and house prices fall.

Susan  White Livermore, a professional housing investor based in Barrie, Ontario, about an hour’s drive north of Toronto, says she sold four of her 20 properties at the beginning of the year as she started to “feel the fear coming in the market.” Now, White Livermore says she’s waiting to see how this correction plays out before she starts buying again.

“Once people have had to deal with the interest rates for a little while, there might be more deals,” she said. “I want to know that we’ve hit the bottom and stabilized before I start looking.”

Canada's house price boom strongest in suburbs as gap with downtown shrinks: Study

The Canadian Press

New research shows house prices in Canada's suburbs grew faster than in downtown areas during the pandemic as remote work spurred a preference for bigger homes.

The Bank of Canada said in a study Monday that the closure of many downtown services coupled with a desire for more living space increased demand for homes in suburban areas.

This shift weakened the so-called proximity premium typically associated with homes in more urban areas, which tend to be more expensive due to scarcer land, shorter commutes and better access to services, the central bank said.

The research shows that while house prices increased strongly in most neighbourhoods during the pandemic, the growth was strongest in the suburbs.

As a result, the real estate price gap between Canada's suburbs and downtown areas -- already narrowing steadily pre-pandemic -- shrank considerably, the bank said.

In 2016, for example, suburban homes in Canada typically sold for 33 per cent less than those in the downtown core, according to the bank's study.

By 2019, they were selling for 26 per cent less as the gap narrowed.

If the same trend continued, by 2021 houses in the suburbs were expected to sell for about 21 per cent less than in downtown areas.

But instead, houses in the suburbs sold for about 10 per cent less than in downtown areas -- a significant reduction in the price gap between the suburbs and downtown areas, the bank said.

Meanwhile, as the economy reopens from pandemic shutdowns many workplaces have fully reopened or transitioned to a hybrid work environment, where workers are required to be in the office a few days a week.

In addition, services and amenities that were shut down during the pandemic -- such as salons, gyms and restaurants -- have reopened.

The shift in working conditions and reopening of downtown offices and businesses could once again influence the housing market.

The bank warned that if the change in preferences towards larger homes outside downtown areas is fleeting, housing prices in the suburbs could face downward pressure.

"If this preference shift is temporary, the proximity premium could return partly toward its pre-pandemic level," the bank said in the study.

"Such a shift in relative prices could be especially problematic if housing supply in more suburban areas were to respond strongly in anticipation of local demand continuing to increase."

GIG ECONOMY 4 UFCW TO ORGANIZE

Loblaw and DoorDash partner on rapid grocery delivery service

The Canadian Press

Loblaw Cos. Ltd. and food delivery company DoorDash Inc. today announced a collaboration that introduces a rapid grocery delivery service to customers in Canada.

Customers will be able to order items from Loblaw retail stores, including Loblaws, Real Canadian Superstore and Shoppers Drug Mart, for delivery from DoorDash in 30 minutes or less.

The collaboration will kick off in major Canadian cities, including Toronto, Vancouver and Calgary.

Loblaw already has a grocery delivery partnership with Instacart, but the 30-minute delivery window will be exclusive to DoorDash.

The agreement comes as DoorDash's share price on the New York Stock Exchange has tumbled more than 60 per cent from its November high.

Financial terms of the partnership were not disclosed. 

CRIMINAL CRYPTO CAPITALI$M

Ontario regulator hits two crypto trading platforms with fines

Hilary Punchard, BNN Bloomberg

The Ontario Securities Commission (OSC) said it approved financial settlements on Wednesday with two cryptocurrency firms – Bybit Fintech Limited and KuCoin -- for failing to comply with the province’s securities laws.

The regulator said both companies operated unregistered crypto asset trading platforms in the province and allowed Ontario investors to trade such assets without a prospectus.

The OSC announced on Wednesday that a panel of the Capital Markets Tribunal ordered a permanent ban on KuCoin from participating in the Ontario market. The company is also required to pay a penalty of $2,000,000 and an additional $96,550.35 towards the cost of the regulator’s investigation.

The panel also approved a settlement agreement with British Virgin Islands-based Bybit that will see the crypto firm disgorge nearly US$2,500,000 and pay an extra $10,000 for investigative costs.

In March 2021, the OSC told crypto platforms to contact the organization if they offered derivatives or securities in Ontario to begin the registration process or face penalties. The regulator said KuCoin and Bybit missed the deadline to contact the commission and continued operations.

The regulator said only Bybit responded to the enforcement action and is now taking steps to bring its platform into compliance.

“Foreign crypto asset trading platforms that want to operate in Ontario must play by the rules or face enforcement action,” said Jeff Kehoe, director of enforcement at the OSC, in a press release.

“The outcomes announced [Wednesday] should serve as a clear indication that we refuse to tolerate non-compliance with Ontario securities law.”

Brookfield props up a Canadian M&A market now beating the U.S.

Kevin Orland and Layan Odeh, Bloomberg News

Brookfield Asset Management Inc. is single-handedly propping up the Canadian market for mergers and acquisitions, accounting for almost a third of the country’s deals this year and providing all the growth that has led the nation to outperform the US.

Toronto-based Brookfield was either a buyer or seller in about US$52.9 billion of announced deals in 2022 through May, more than five times its US$9.1 billion tally a year earlier, according to data compiled by Bloomberg. This year’s total accounts for 31 per cent of the US$171.6 billion of all deals involving Canadian companies, up from involvement in about 5.7 per cent of activity by the same point in 2021.

The world’s largest alternative-investment firms have billions of dollars of committed funds that they’re looking to deploy, and even this year’s market selloff hasn’t been enough to deter them. Transactions by Brookfield, as well as pension funds including Canada Pension Plan Investment Board, helped increase the value of deals involving Canadian companies 7.8 per cent through May, compared with a 6.6 per cent decline in the US.

 “The amount of money that private equity is managing and the amount of private capital that also sits in the pension plans, relative to the size of the Canadian market, is a material factor,” David Rawlings, chief executive officer for Canada at JPMorgan Chase & Co., said in an interview. JPMorgan was the top adviser for Canadian mergers and acquisitions through May, working on 14 deals with a combined value of US$43.6 billion, according to the data.

Excluding Brookfield’s deals this year and last, Canada’s M&A market would have been down about US$31.4 billion, or 21 per cent. Over the past year, Toronto-based Brookfield has raised US$71 billion and invested US$70 billion. The firm has sold around half that amount, according to a presentation during its annual general assembly.

Brookfield’s high-profile deals this year include the US$6.4 billion acquisition of US software firm CDK Global Inc. and the US$5 billion takeover of UK emergency household repairs provider HomeServe Plc. Brookfield also is involved in a group that is taking Nielsen Holdings Plc private in a deal that values the television-ratings firm at US$16 billion including debt. Brookfield also has been a seller, divesting a 49 per cent stake in New York’s One Manhattan West office tower. 

The second half of the year may see more diversified merger-and-acquisition activity, Rawlings said, adding that JPMorgan’s deals pipeline is “strong across multiple industries.” Canada’s preponderance of mining and energy companies, which have had their balance sheets bolstered by strong commodity prices, may be active in dealmaking through the remainder of 2022, he said.

That trend may already be underway. Johannesburg-based Gold Fields Ltd. agreed to buy Toronto-based Yamana Gold Inc. for about US$7 billion in a deal that would make make the South African miner the world’s No. 4 gold producer.

“Investors have almost forced these companies to pull back on development spending,” Rawlings said. “They’re generating a lot of cash, but there still is a need for consolidation to drive efficiency, even in a strong commodity-price environment.”

Labour crunch spurs losses, cancelled projects in Canada

Randy Thanthong-Knight, Bloomberg News

Labor shortages are impacting investment plans and generating “tens of billions” in lost sales at a majority of companies in Canada, according to a report by one its largest business advocacy groups.

The Business Council of Canada released a poll of 80 of its members on Friday that found two-thirds claiming the labor crunch is forcing them to cancel or delay projects, while 60 per cent say it’s led to revenue losses. Nearly a third say they’ve been forced to relocate work outside of Canada or led to a loss of market share. In total, the survey found 80 per cent of these companies are reporting trouble filling positions.

The numbers underscore the extent to which lack of workers has become the primary concern for Canada’s business executives, and the biggest constraint on the nation’s economic expansion. They also illustrates the importance of maintaining high levels of immigration into the country, according to Goldy Hyder, chief executive of the business lobby group.

“Businesses are looking for whatever options they have to make sure they’re having full capacity,” Hyder said in a telephone interview. “It’s time we catch up to where we need to be in order to compete.”

Immigration has always been a driving force of labor supply in Canada, which competes for economic immigrants with destination countries like Australia, the UK and US. But now with record job vacancies of more than a million and an aging workforce, Canadian employers have become even more reliant on migrant workers. 

International migration has helped push Canada’s population growth to almost twice the pace of every other Group of Seven country, rising 5.2 per cent from 2016 to just under 37 million people in 2021. In the first three months of this year, the country’s population grew at the fastest rate for a first quarter since 1990. 

Half of the firms surveyed said Canada should increase its annual intake of permanent residents, while the rest support the government’s current plan to bring in more 1.3 million newcomers over the next three years.

The 80 companies surveyed employ nearly 1.7 million people in more than 20 industries. The shortages exist in every region, and are worst in three most populous provinces Ontario, Quebec and British Columbia. The poll was taken in the first quarter of 2022.

COMMODITY FETISH

Pink Floyd is seeking US$500M for music catalog including 'The Wall'

Lucas Shaw, Bloomberg News

Journalists film with their cameras an installation part of the Pink Floyd Exhibition: "Their Mortal Remains", in Rome, Tuesday, Jan. 16, 2018. , Gregorio Borgia/AP Photo

Members of the rock band Pink Floyd are seeking at least $500 million in a deal for their music catalog, according to people familiar with the talks, which would be one of the largest sales in music history.

The group known for hits such as “Money” and “Comfortably Numb” is selling its recording and songwriting catalog, as well as the power to create merchandise based on the band, said the people, who asked not to be identified because the talks are confidential. Patrick McKenna, who is representing the band in the process, didn’t respond to an email seeking comment.

McKenna has winnowed the list of potential buyers to four, said the people. The names include Warner Music Group Corp., Sony Music Entertainment and BMG. Sony and Warner already distribute some of Pink Floyd’s music.

The British rock band released some of the most popular records ever, including “Dark Side of the Moon” and “The Wall,” two albums that defined music in the 1970s. The group has sold 75 million records in the US, the 10th most of any artist, according to the Recording Industry Association of America.

Many famous musicians have cashed in on a frothy market for song catalogs in recent years, capitalizing on interest from both music companies and financial firms. Bob Dylan sold his recordings to Sony Music in a deal estimated to be worth more than $150 million, and his song catalog to Universal Music in a deal for between $200 million and $300 million.

Investors are starting to grow wary of shelling out for music portfolios due to rising interest rates and uncertainty about the economy. But demand has held steady at the very top of the market.

Getting all of the members of Pink Floyd to agree on anything has been a challenge for decades. The band formed in 1965 under the direction of then lead singer Syd Barrett, who left three years later. Singer and bassist Roger Waters left the band in 1985 and later sued his fellow band mates over their use of the name. Waters and the rest of the crew have squabbled over the years as the band, led by guitarist David Gilmour, continued to release records. 

That is a big reason they chose McKenna, who runs the UK-based advisory group Ingenious Media, to guide them through the process.

Kurdistan Looks To Set Up Own Oil Firms Amid Legal Struggle With Baghdad

By Tsvetana Paraskova - Jun 17, 2022, 

Amid an escalating dispute with the federal Iraqi government over the control of oil resources, the semi-autonomous region of Kurdistan is working to establish two companies that would produce and market oil, a spokesperson for the Kurdistan Regional Government (KRG) told Reuters on Friday.

KRG wants to establish one company to work on oil exploration, KROC, and another—provisionally named KOMO—which is expected to market and export the crude oil pumped in the region of Kurdistan.

The KRG has recently discussed the idea of establishing those companies with representatives of the federal government of Iraq, the spokesperson told Reuters.

The region of Kurdistan and the federal government have been in a bitter dispute for months over who has the right to control the oil resources and revenues in the semi-autonomous Iraqi region.

Earlier this month, Kurdistan rejected a ruling from Iraq’s federal supreme court to hand over control over oil production. 

In February, the Supreme Court of the Federal Government of Iraq ruled that sales of oil and gas by Kurdistan, independent of the central government in Baghdad, are unconstitutional and that the Kurdistan Regional Government must hand over all oil production to the Federal Government of Iraq. The court also ruled that the Ministry of Oil has the right to: “Follow up on the invalidity of oil contracts concluded by the Kurdistan Regional Government with foreign parties, countries and companies regarding oil exploration, extraction, export and sale.”

In early June, dismissing the Supreme Court ruling, Kurdistan’s judicial council said that “The actions of the Kurdistan Regional Government (KRG) in relation to oil and gas operations are in accordance with the Iraqi constitution of 2005. The provisions of the oil and gas law issued by the parliament of the Kurdistan region in 2007 do not violate those of the Iraqi Constitution.”  

By Tsvetana Paraskova for Oilprice.com

Freeport LNG Extends Force Majeure Until September

By Julianne Geiger - Jun 17, 2022, 

Freeport LNG has declared a force majeure on LNG exports from its Gulf Coast location until September, Bloomberg sources said on Friday.

The company had reported earlier in the week that its Gulf Coast facility would be completely offline through September when it would operate in a partial capacity through the end of the year. It did not, however, specify a force majeure.

The original estimate for Freeport LNG’s outage was three weeks, but the estimate was quickly revised to span until September as the damage from a fire last week was assessed.

As a result, U.S. LNG exports are expected to remain subdued at least through September. This would keep more LNG for domestic use beyond what the market requires—a reality that has sent U.S. LNG prices down. On the other hand, Europe, starving for LNG imports from anywhere that isn’t Russia, has seen higher LNG prices as its U.S. prospects were dashed by the facility’s fire.

The Houston-based Freeport LNG facility accounts for 20% of all LNG processing in the United States, at 2.1 Bcf a day. It is the 7^th largest LNG facility in the world, and the United States’ 2^nd largest.

The impact of the Freeport LNG shutdown became even more significant this week after Russia cut its gas flows to Germany and Italy, with France not receiving any gas from Germany since Wednesday. What’s more, Russia’s Nord Stream 1 pipeline that carries gas from Russia to Europe will be down for weeks for regularly scheduled maintenance in July.

The outages and curtailments will force some European countries to burn some of the gas that it was trying to store for the upcoming winter season, although Germany said it would look to Norway and the Netherlands for additional gas supplies.

By Julianne Geiger for Oilprice.com

Iraq Wants To Buy Exxon’s Stake In Key Oil Field

By Irina Slav - Jun 20, 2022,

The Iraqi government is ready to buy Exxon's stake in the West Qurna-1 oil field, the country's oil minister said this weekend, after the supermajor earlier announced plans to exit the project.

Per news reports from Reuters and Bloomberg, the bulk of the 32.7-percent interest in one of Iraq's largest fields will go to Basra Oil Company.

Earlier this year, Exxon had agreed with two Chinese companies to transfer its West Qurna-1 stake to them, but the Iraqi government was not on board with that deal, and it was never finalized. Exxon's stake in West Qurna-1 was valued at up to $500 million in 2020 when the supermajor announced its plan to exit Iraq.

As for the reasons for the exit after a long involvement in Iraq's oil industry, at the time, Iraqi Prime Minister Mustafa al-Kadhimi said that "Exxon Mobil is considering exiting Iraq for reasons that are to do with its internal management practices, decisions, and not because of the particular situation in Iraq."

At the time, Al-Kadhimi said that Iraq would only accept another American company as a replacement for Exxon at West Qurna-1.

Media, however, suggested that the decision might have something to do with worsened relations between the supermajor and the Iraqi government after Exxon got involved in oil production in the Kurdistan autonomous region, whose leadership is at odds with Baghdad.

Iraq is the second-largest producer of oil in OPEC, but it has been struggling to produce as much oil as it had been assigned under the OPEC+ agreement reached last year.

Despite the problems plaguing its oil industry, however, Iraq has ambitions of higher production still, eyeing an average daily of 4.51 million barrels for this month and 4.58 million barrels for July, per a Bloomberg report. In May, Iraq produced 4.4 million barrels of oil daily, a decline of 21,000 bpd from April.

By Irina Slav for Oilprice.com