Tiff Macklem

All You Can Eat

Steve Saretsky -

A sliver of hope has emerged for the Canadian economy as the labour market added nearly 380,000 jobs in September. The unemployment rate is slowly coming down, now hovering at 9%, surpassing most economists expectations on the recovery front. However, those job gains could prove temporary, with the Ontario government reintroducing rolling lockdowns once again. Toronto, Ottawa and Peel region will once again be closing indoor restaurants, bars, gyms, and asking people not to travel.

In other words, fiscal and monetary support is going nowhere anytime soon.

While the benefits of such programs are helping to support jobs, and ease financial pain, there is no such things as a free lunch. In a speech this past week, Bank of Canada Governor Tiff Macklem, noted “our policy path will eventually have an impact on financial system vulnerabilities. As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road.”

Macklem is referring to Canada’s private debt loads, which currently rank third highest amongst the G-20 nations. They need to keep these debt loads growing in order to avoid a painful debt deleveraging. This requires keeping interest rates at zero for the foreseeable future. A move that will push already destabilizing debt loads higher, kicking the can further down the road.

Now, one of the most obvious side effects of these policies is a booming real estate market. A strange phenomenon considering we are in the midst of one of the worst recessions in recent memory. But thanks to seemingly unlimited liquidity injections, house prices are climbing higher across the nation- even with mortgage deferrals still running hot. As of the end of August, 16% of all Canadian residential mortgages had at one point or another deferred a payment. Of those deferrals, 32% have since resumed payments. This suggests that about 11% of all mortgages are still being deferred.

According to the latest figures from CMHC, their insured (tax-payer backed) residential mortgage portfolio is also cause for concern. Active deferrals on CMHC insured mortgages at end of August are as follows:
AB – 18.9%
SK – 13.9%
NL – 13.1%
BC – 10.3%
MB – 9.8%
YT/NU/NT- 9.0%
NS – 9.0%
ON – 8.9%
NB – 8.3%
QC- 8.0%
PEI – 7.6%

So, on one hand you have record home sales and rising prices, and on the other hand you have a huge risk of mortgage deferrals morphing into defaults. Per RBC, If 20% of mortgages under deferral eventually become delinquent in Canada, this equates to a mortgage delinquency rate of 2.3% which is almost 4 times higher than the peak Canadian mortgage delinquency rate over the past 30 years.

And so, policy makers are throttling stimulus into overdrive, opting to deal with the consequences at a later date.

If this current round of stimulus doesn’t work, the Bank of Canada is prepared to dip back into the ever expanding toolbox,  “We’re not actively discussing negative interest rates at this point, but it’s in the tool kit and never say never”, added Macklem.

Yield curve control and negative interest rates are becoming a very realistic probability in Canada.

It’s an all you can eat debt buffet, Happy Thanksgiving!

Three Things I’m Watching:

1. Active deferrals on CMHC insured mortgages at end of August by province.

2. House price growth has accelerated higher across Canada since the pandemic.

3. Condo inventory under construction is at record highs across Canada at a time when investor demand has pulled back.

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The Saretsky Report. December 2022