Free Markets

Steve Saretsky -

Happy Monday Morning!

Official data released by the Canadian Real Estate Association this past week highlighted a continuation of a blazing real estate market, ripping across the nation. Home sales across Canada jumped 32% year-over-year in October, it was the busiest month of October on record. Sales were up, and inventory for sale continued to shrink. There was just 2.5 months of inventory on a national basis at the end of October 2020 – the lowest reading on record for this measure. At the local market level, some 18 Ontario markets were under one month of inventory at the end of October.

The widely anticipated housing crash has, so far, failed to materialize. Although, given the unprecedented levels of monetary and fiscal support, it really isn’t that hard to believe when you think about it. Thanks to generous support programs and a sea of liquidity printed by the Bank of Canada, Canadian households are sitting on $90B of excess cash since the pandemic. Furthermore, Canada’s M2 Money supply growth has grown by nearly 15% so far this year.

Just to clarify, M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. Central banks target money supply growth to try and spur inflation, or in this case, prevent a deflationary spiral that would normally be prevalent during this COVID induced economic destruction. So yes, the banks have essentially printed an additional 15% more currency into the financial system. That probably helps explain why home prices were up 11% year-over-year in October. It probably also explains why inflation accelerated higher than expected in October. Per Stats Canada, Annual inflation accelerated to 0.7%, above consensus estimates of 0.4%. The move higher was the result of housing, where the index of replacement costs for homeowners rose by the most in 30 years last month.

My concern here is that house prices are currently rising by about 1% per month at a time when immigration is basically non-existent, and the labour market remains incredibly weak. Fast forward six months and lets assume a vaccine is more widespread, the economy re-opens, and the labour market begins its recovery. What then?

Remember, the Bank of Canada has re-iterated they will pin interest rates to the floor until at least 2023. There’s nothing they’d love more than excess inflation to help purge our mountain of debt. If and when bond yields being to rise, they will, without a doubt, introduce some form of yield curve control. It goes without saying that in no way, shape or form can the economy tolerate higher real interest rates. They will have to be manipulated lower, it becomes essentially an issue of national security.

I understand that doesn’t leave much for free markets, but sadly those died a long time ago.

Three Things I’m Watching:

1. Canadian households are sitting on $90B of spare cash as consumer deposits surge during the pandemic.

2. National home prices surged 11% year-over-year in October.

3. Canada’s debt pile has ballooned since the pandemic. Global debt will hit $277 trillion by the end of 2020.

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The Saretsky Report. December 2022