Build Back Better

Steve Saretsky -

Here we go, the highly anticipated federal election this fall is now confirmed. The Trudeau government will seek to win a majority government in what is undoubtedly a power grab at a pivotal time in history. “Canadians need to choose how to finish the fight against COVID-19 and build back better. From getting the job done on vaccines to having people’s backs all the way to and through the end of this crisis”, noted Trudeau in a press conference Sunday.

Regardless of your political leaning, there’s no question this will be a critical election as the economy recovers from the pandemic. One thing is clear, we are entering a new era, one marked by increasing government control. Economic growth is going to rely heavily on fiscal spending and central bank debt purchases moving forward. Debt levels are simply too high, and in order to squeeze more growth from an over indebted society, government will need to keep their foot on the fiscal accelerator, and the central bank will have to play along, mopping up debt issuance to keep borrowing costs in check.

You might not like the sounds of that, but it is what it is. No government in this election is going to win on austerity. So yes more spending, real negative interest rates, and higher taxes all seem like an inevitable future.

Next up is housing. There will be lots of promises in this election, and we went over most of them a few weeks ago. More foreign buyer taxes are a slam dunk, and every political party has some version of that in their platform.

I’m not convinced foreign buyer taxes are going to solve the housing crisis, at least they haven’t in Vancouver & Toronto so far, but at least they win over voters. The real problem is not enough housing, and there are a few reasons for that.

1. Setting arbitrarily high immigration targets without having a proper strategy in place with municipalities to build the additional housing required to support the growing population.

2. Increasing investor demand thanks to an abundance of cheap credit that is looking for a store of value.

The second point is important. Real mortgage rates in Canada are currently running at negative 1.5%. In other words, inflation is 3% yet the cost of a new mortgage today is half that. You are essentially being paid to take out a mortgage and yet people are still trying to figure out why home prices are surging higher. My personal view is the governments CPI inflation basket is underreporting the true inflation rate and we are probably closer to 5% like our US neighbours. This means the real mortgage rate is closer to negative 3.5%. It is hard to be bearish with deeply negative mortgage rates.

Happy vote buying season.

Three Things I’m Watching:

1. Real mortgage rates in Canada are currently running at negative 1.5% (Source: Edge Analytics)

2. Money velocity in Canada still falling. In other words capital is not going into the productive economy but into assets. (Source: Brian Chang)

3. In the city of Vancouver it is illegal to build anything other than a house or duplex in the yellow areas. The average price for a house in the yellow area, $2.5M. (Source: Tristin Hopper)

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The Saretsky Report. December 2022