Trickle Down Economics

Steve Saretsky -

The Bank of Canada maintained their policy stance this past week, opting to keep the overnight lending rate at 0.25%, while maintaining their QE (money printing) program at the same pace of $4B per week. Once again, the message from the Bank of Canada remains, money will be cheap until at least 2023- and arguably much longer given the crippling debt loads the country faces.

As we have talked about before, nothing in this world is free, you simply can not print money without consequences. Recent data from Stats Canada highlights the real world ramifications, which continue to show up in the widening wealth inequality these policies are creating. Remember, one of the intended consequences of QE is to raise asset values. According to Stats Canada, the 2020 housing boom resulted in Canadian homeowners adding over $1 trillion to their net worth. Renters, on the other hand, saw their net worth expand by less than $90 billion. The average homeowner added $66,000 per household, while renters added less than $5,000 per household. This what they call trickle down economics at work, except it’s less of a trickle and more of a slow drip.

The Bank of Canada does not have a house price mandate so don’t expect any change of heart from them. The reality is this will eventually be tackled by the federal government, likely in the form of higher taxes, aimed directly at higher net worth households. Don’t shoot the messenger.

The Banks actions spurred a housing boom and helped speed up the economic recovery, albeit not without repercussions. House price valuations are stretched, and it seems increasingly difficult to think we’ll be able to squeeze even more economic juice out of the housing sector in the future. Unless you think interest rates are going negative, it’s going to be difficult to boost the housing market through interest rates. We’ve had 40 years of declining mortgage rates to support the housing market.

Each decade the 5 year mortgage declined as follows:
1980 to 1990: -8%
1990 to 2000: -38%
2000 to 2010: -42%
2010 to 2020: -35%

In other words, every time the going got tough, borrowing rates fell and Canadians were able to lower their debt servicing payments. If policy makers want to keep this game going they’ll have to extend amortizations during the next downturn. Game on.

Three Things I’m Watching:

1. Despite the pandemic, Canadians household net-worth grew 9% in 2020, largely due to real estate values inflating. (Source: Bloomberg)

2. HELOC’s (Home Equity Lines of Credit) have been falling over the past 7 quarters. (Source: BMO)

3. The Bank of Canada’s balance sheet is still growing as they opt to maintain their QE program of $4B per week. (Source: Bank of Canada)

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The Saretsky Report. December 2022