Fasten Your Seatbelts

Steve Saretsky -

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 that stimulus and asset prices collapse, dragging the economy down with it.

Now lets turn our attention to Canada, where the Bank of Canada has recently injected $400B worth of QE (money printing) into the financial system. This has simultaneously boosted asset prices such as housing, while devaluing the purchasing power derived from incomes.

In a recent interview, Bank of Canada Governor Tiff Macklem noted the side of effects of QE. Suggesting, “inflation is born disproportionately by the less wealthy people, they tend to operate more in cash, and so they tend to disproportionately bear the cost of inflation.”

While the repercussions are obvious, rest assured these policies aren’t going anywhere. The Bank of Canada remains fully pledged to keeping rates at zero into 2023, while maintaining asset purchases until the recovery is fully underway.

The point being, is that political pressures are mounting to do something about housing affordability. However, central banks are clear this is not their responsibility, despite their own doing. In other words, government officials at the federal and provincial levels will be forced to step in. I fully anticipate further regulations and taxation aimed at the housing market. In my opinion this is the only imminent threat preventing house prices from seriously melting higher.

I don’t know what those policies will look like, but I think we could be in for another bumpy ride in 2021. Fasten your seat belts.

Three Things I’m Watching:

1. Per the Bloomberg Nanos survey, 49.2% of Canadians see home prices climbing over the next six months. Highest share since May 2017.

2. Less than 45,000 mortgages deferred at the end of Nov. Had all of those houses hypothetically been foreclosed/listed for sale that month, there would still have been fewer homes for sale across the country than in Nov 2019. (Source: Ben Rabidoux, Northcove Advisors)

3. The sales to new listings ratio in Canada points towards further home price inflation. (Via Capital Economics)

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The Saretsky Report. December 2022