Who’s to Blame?

Steve Saretsky -

Bank of Canada deputy governor, Paul Beaudry is worried about the number of investors flooding the housing market. According to the Bank, investor buying has doubled since the start of the pandemic, while purchases by first-time homebuyers have increased about 45 per cent.

“A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can become self-fulfilling, at least for a while,” Beaudry said. “That can expose the market to a higher chance of a correction. And, if one occurs, the damage can spread far beyond the investors.”

Of course there was no mention of the Banks involvement in the flurry of investors piling into the housing market. Need I remind you that the Bank slashed rates to near zero, pumped $5B worth of QE (money printing) into the financial system per week, and then begged the consumer to borrow money last July. And borrow they did. Residential mortgage credit growth is running at 10% right now, the fastest pace in a decade.

In other words, the Bank of Canada blaming investors for inflating the housing market is akin to a drug dealer blaming the addict for overdosing. If you supply an addict with free drugs (cheap credit) you should not be surprised if they overdose (take on too much debt).

We’ve now tried a foreign buyers tax, empty homes tax, speculation tax, mortgage stress test, record new home completions, and yet house prices continue to push higher. We’ve tried everything but raise the cost of borrowing money. Imagine that.

Of course we all know there’s no willingness to raise borrowing costs, because, well, it might actually work. Lower home prices not only destroys bank collateral in a financial system that is levered 4 to 1, but would crush government tax revenues.

Remember, in 2018 mortgage rates hit 3.5% and everyone thought they were going to 4%. What happened that year? Home sales in Greater Vancouver fell to an eighteen year low, and in the Greater Toronto area home sales fell to their lowest total in a decade. Not surprising that two highly levered housing markets slumped as borrowing costs ramped up.

Of course central banks panicked and quickly slashed interest rates, putting an end to the year long bear market in housing. In other words, no policy maker is going to willingly introduce policy to push house prices lower. Any correction in the housing market will come from an external shock elsewhere in the world.

It’s as if investors have figured out policy makers have their backs, and so they continue to pile in, can you blame them?

Three Things I’m Watching:

1. Per the Bank of Canada, investor activity in the housing market has doubled since the pandemic. (Source: Bank of Canada)

2. Real rates in Canada have been negative for over a decade. Good for asset holders, terrible for savers. (Source: Acorn Macro)

3. Greater Vancouver home sales fell to 18 year low in 2018 when mortgage rates hit 3.5%. (Source: REBGV, Steve Saretsky)

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The Saretsky Report. December 2022