Printing Prosperity

Steve Saretsky -

“When the value of one asset outpaces the economic production of an economy, at some point, it has to end. The dream will become a nightmare.”

Those were the stark words from the head of Canada’s Mortgage & Housing Corporation in his latest interview with Yahoo Finance. The often outspoken Evan Siddall worries continued intervention and promotion of home ownership is blowing an unsustainable debt bubble, that will eventually propel prices lower once it pops. “The problem is that we’re in a game of musical chairs and when the music stops playing, it’ll be young first-time homebuyers who are holding the bag.”

Siddall and his CMHC employees maintain their view on a house price correction between 9-18% over the coming year. However, like many housing bears who have called for the catastrophic end to the multi-decade run-up in home prices, those warnings haven’t seem to slow the nations impenetrable housing market.

Housing sales are on the rise, and so too are prices, at least for single family homes on the outskirts of the city. Bidding wars are ravaging suburban towns as work from home orders push people further away from the city. Armed with record low mortgage rates and a sea of liquidity, Canadians are doing what they do best, borrow money to buy real estate. This comes despite recent data from Stats Canada suggesting the second quarter will go into the books as probably the worst since the Great Depression.

If you’re wondering why house prices haven’t corrected, and why CMHC’s bearish forecasts are looking embarrassingly wrong, look no further than the Bank of Canada. The printing presses are running in overdrive, monetizing fiscal debt at an unprecedented pace.  The Bank of Canada’s balance sheet has grown by more than 400% since the pandemic, while Canada’s M2 money supply has expanded by more than 10% this year. Furthermore, the banks holdings of Canada Mortgage Bonds has grown by more than 30X.

Of course there is no such thing as a free lunch. Supporting asset prices creates a growing divide between the haves and the have nots. Those who don’t hold assets, such as real estate, are not benefitting from the central bank put. The national wealth breakdown reveals the country’s dependence on real estate assets. By Q3 2018, real estate wealth of $8.75 trillion took up 76 per cent of the total $11.42 trillion national wealth. Thus, ultimately illuminating the fact that real estate has become a one way trade that is deemed, at least by policy makers, as too big to fail. The consequences of which will show up through social unrest and fringe politics from the have-nots once they figure out they got the short end of the stick.

As the saying goes, you can not print your way to prosperity.

Three Things I’m Watching:

1. The Bank of Canada’s balance sheet has grown more than 400% since the pandemic.

2. By Q3 2018, real estate wealth of $8.75 trillion took up 76% of the total $11.42 trillion national wealth.

3. Toronto rent prices are falling, declining by more than 5% on a Y/Y basis.


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