Not Sustainable

Steve Saretsky -

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 hovering below 1%, Macklem said the central bank is more worried about deflationary pressures than any temporary overshoot of its 2% target.

“We are aiming for 2% but we are going to use the band and we are going to use the risk management framework to get there as quickly as possible,” he said.

Yes, stimulus is here to stay, and if the Bank of Canada still thinks there’s no housing bubble, then you probably ain’t seen nothing yet.

The Bank of Canada owns 36% of the government bond market today, and they are comfortable growing to 50%. At the current pace of buying they have another year of QE on the table before they reach that target. However, if you think they’ll suddenly remove the punch bowl once they hit that target – you are sorely mistaken. Drink up!

Three Things I’m Watching:

1. No housing bubble? Leading indicators point to likely price appreciation ahead. (Source: Ben Rabidoux, North Cove Advisors)

2. The pandemic has increased buyer preferences for larger single family homes. (Source: Bank of Canada)

3. The Bank of Canada owns 36% of the Government bond market. It will reach 50% within 12 months at current pace. (source: Brian Chang)

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The Saretsky Report. December 2022