Truth is Like Poetry

Steve Saretsky -

To the dismay of prospective home buyers hoping for a cool down in the nations housing market, Bank of Canada governor Tiff Macklem left interest rates unchanged this past week. It was an odd move considering a 25bps rate hike was already priced into the markets, and there would have been no justification needed, given CPI inflation is currently running at thirty year highs. Instead, the Bank of Canada will wait until March to raise rates a mere 25bps.

In essence, the Bank of Canada extended the housing bull market another six weeks. While rates will clearly be heading higher, it will take some time for this to filter through into housing. Remember, most buyers secure their mortgage rate for 90 days, so they won’t be impacted by any immediate rate hikes. This is particularly true for variable rate mortgages which can still be had for around a stunningly low 1.3%. It’s no wonder this product remains historically popular, with nearly 55% of all new originations opting to go with variable rates.

Ironically, the only question the Bank of Canada received on the housing front was regarding the growing uptake in variable rate mortgages. The long winded answer from deputy governor Rogers was the following, “Overall the banks view is that the most important thing that will restore balance to the housing market in Canada is an increase in supply. Supply has not kept pace with demand.”

In other words, don’t look at us, housing is not our responsibility. The central banks are taking very little responsibility in stoking demand through ultra low borrowing costs. Like it or not, this has been the response from central bankers around the world, including recently in Australia and New Zealand where their central banks turned down the notion of including home prices in future monetary policy decisions.

What’s important to take away here is the recent response from policy makers across the spectrum. Every level of government is pointing to supply, that is the problem and the solution. Whether you agree or not is irrelevant, that is what they are going with. The Bank of Canada is blaming supply, OSFI, the banking regulator recently dismissed the role of investors and suggested many more homes need to be built. Furthermore, the federal and provincial governments are now all talking about supply, and much less on the demand side after trying to tax the housing market into affordability.

There’s just one problem. Adding supply, or rather blaming supply, allows everyone to pass the buck. Adding supply is no easy task. It takes a concerted effort from all levels of government, federal, provincial, and municipal to work in unison to fast track approvals. Government is simply too big, too slow, and too unproductive to create any real change. Furthermore, the construction industry is already plagued by a shortage of trades and supply chain bottlenecks. We need more supply but adding more, significantly more, is going to be a near impossible task.

I am all for more supply, we could use more of it. However, so long as REAL mortgage rates remain at negative 3-4%, and arguably more like NEGATIVE 8-9% if we properly measure inflation, there will continue to be an overwhelming flow of capital into the housing market. Remember, banks can create credit faster than developers can build new homes.

As the old saying goes, truth is like poetry, and most people fucking hate poetry. Policy makers are totally stuck and the only thing they can do to actually fix housing is raise interest rates. There’s just one problem, total non-financial debt to GDP in Canada is 350%. In other words, you can raise rates to quell inflation and slow housing, but you’ll send the economy into a tailspin as a result. Pick your poison, because at this stage in the game, you can’t have both.

Three Things I’m Watching:

1. Canada has a record 295,000 homes currently under construction. (Source: Stats Canada)

2. New home completions in Canada at record highs. Surpassing previous highs set in 2009 and 1988. (Source: CMHC)

3. Canada’s debt burden is a heavy load. (Source: Acorn Macro Consulting)

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The Saretsky Report. December 2022