Side Effects

Steve Saretsky -

There’s no question low interest rates and a seemingly unlimited amount of QE (money printing) is creating distortions across financial markets, and in particular our housing market. However, according to former Bank of Canada governor Stephen Poloz, this all par for the course. “If the side-effect is a hot housing market, that’s one I’ll take every day” noted Poloz in an interview with BNN Bloomberg. Adding, “It’s hot, and we could see signs of speculation, but we have to accept that because otherwise we would have a really, really bad recession.”

In case you needed further evidence the housing boom was manufactured in Ottawa, look no further. While Poloz is right in the fact we avoided what would have been a deeper recession, it does not come without consequences. These policies will have a crippling blow on the younger generation, already struggling to enter the housing market. By printing a whole whack of loonies, we have essentially debauched the value of the currency, eroding purchasing power, decimating savers, while simultaneously boosting asset prices. Again, growing the divide between the haves and the have nots.

It should come as no surprise that political tensions are boiling over, with increasing calls for government to step in and fix the mess they created. There seems to be an increasing number of opinion pieces circulating in mainstream media urging for a reform of tax policy, in particular, a tax on primary residences. Let me be very clear, a tax on your principal residence will help narrow the wealth gap. It will, however, do nothing for housing affordability.

I find it highly unlikely the government will impose a tax on 2/3rds of their voter base. Although, I do believe it is more likely they could put a cap on the principal residence exemption. For example, principal residence exemption could be granted for gains up to $1M, and anything over that amount would be subject to taxation. It would likely be dressed up as a “wealth tax”, since those seem to be all the rage these days.

For the record I am not advocating for these changes, but I do believe we are reaching a tipping point. Ottawa’s continued boosting of the housing market has created unsustainable house prices and destroyed affordability for the younger generation, who, at the same time is now beginning to enter politics, while also growing their share of the overall voter base.

The Canadian housing market is facing increasing scrutiny and whether you like it or not will likely face a barrage of taxes in the years ahead. Proceed accordingly.

Three Things I’m Watching:

1. House prices are not going up, rather fiat currency losing purchasing power. Canadian home prices when measured in gold. (Source: Eric Escobar)

2. Prices of new homes in Canada are accelerating at their fastest pace since 1989. (Source: Bloomberg)

3. Canada’s population rose by just 0.4% in 2020. That’s the slowest annual growth since 1916. (Source: Bloomberg)

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The Canadian Economy

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The Saretsky Report. December 2022