Bank of Canada governor Tiff Macklem says he’s not worried about a housing bubble. His comments follow the banks decision this past week to maintain current stimulus, keeping rates at 0.25% and continuing their QE program which is currently running at a pace of $4B per week. These programs will remain in place until the recovery is “well underway.” Make no mistake, the current froth emanating out of the housing market is a result of the banks actions, whether they want to take responsibility for it or not. Ironically, Macklem flagged the housing market as a key risk back in 2013 when he was deputy governor at the Bank of Canada. In 2013, Macklem publicly stated the growth in household debt and house prices was “not sustainable”. Since then, national home prices, as measured by the home price index, shows home prices are up 71%, an average annual growth rate of just over 10%. In other words, you’ve had double digit house price inflation, yet the banks official CPI inflation metric suggests annual inflation has miserably failed to hit their mandated 2% target. Perhaps we are measuring inflation incorrectly? However, don’t expect any sudden revelation from the central bank. With inflation

Against all odds, the Canadian housing market continued its torrid pace, ripping to new highs in the month of December. The Canadian Real Estate Association announced national home sales printed new highs for the calendar year. Yes, 2020 was full of surprises, and the depth of our nations housing fetish was certainly one of them. There was a total of 551,392 home sales recorded in 2020, surpassing the previous high set in 2016 when a wave of offshore money flooded the market. This time around the story is much different. This surge in buying activity has been prompted by several conditions. First and foremost, back in March/ April, policy makers had a decision. Pump the financial system full of liquidity and support asset prices, or do nothing and watch households collapse under a mountain of debt, while sending home prices tumbling. Four hundred billion dollars worth of Quantitive Easing later, combined with an immediate relaxation in capital reserve requirements for the banks, and a generous mortgage deferral program for the people, and there you have it. Not only did we save home prices, we actually increased them. A miraculous accomplishment despite all odds. Home prices closed out the year up

Last week we discussed the ongoing dispute in New Zealand, where the finance minister has been arguing with the head of the central bank to consider house prices in their central bank monetary policy framework. Like nearly everywhere else in the world, New Zealand is grappling with a severe housing affordability crisis. Despite pulling numerous policy levers, house prices continue to inflate. The last lever, raising interest rates, remains off the table. Things have only gotten worse during the pandemic. “We’ve probably seen the biggest widening of wealth distribution that we have ever seen in New Zealand between people who own houses and those who don’t,” said Arthur Grimes, professor of public policy at Victoria University of Wellington. According to the Real Estate Institute of New Zealand, the median house price in New Zealand has surged nearly 20% this year. Ironically, in 2018, new elected Prime Minister Jacinda Ardern fulfilled her election promise of banning sales of residential housing to foreign buyers. Clearly that wasn’t the solution. New Zealand’s problems are not unique. The same discussions are ongoing in Canada. Home prices are up double digits this year, despite record job losses. The wealth gap continues to widen, prompting the Trudeau Government

Back in October 2020, I tweeted “Unpopular view, but the next move for Canadian housing could be an absolute face ripping rally higher.” To be honest, I was hoping I would be wrong but the data doesn’t lie. The bearish thesis on Canadian housing was always about bank lending. Everyone assumed banks would tighten credit due to the ongoing economic destruction and mounting job losses. However, it turned out to be the opposite. Aided by Government policies, banks ramped credit creation into overdrive, funneling massive amounts of new credit into the housing sector. The bulk of new credit that banks created was done by issuing new mortgage loans. The banks stoked a credit boom to inflate prices and stave off a downturn in the housing market and the economy. It really is that simple.

It’s no surprise that a decade of zero interest rate policy has inflated housing prices across the globe. The result is a growing wealth gap, and social discontent. This discontent has reached a boiling point in New Zealand, where finance minister Grant Robertson has asked the Reserve Bank of New Zealand to step in and rein in the surge in home prices. The Finance minister of New Zealand has asked the central bank to consider stabilizing house prices as a factor for consideration when formulating monetary policy. That request, however, fell on deaf ears. “Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency.” Rebuked Reserve Bank of New Zealand Governor Adrian Orr. Adding, “Targeting higher interest rates to cool housing would lead to lower employment, which most affects those at the margins of the labor market. Other trade-offs could be a higher New Zealand dollar exchange rate and lower growth in housing supply.” In other words, not our problem. You see, policy makers are caught in a catch 22. Asset prices drive the economy, not the other way around. Asset prices now rely on continued stimulus, remove