Bullish Government Incompetence

Steve Saretsky -

I know you probably don’t need another reminder on inflation so i’ll keep this brief. Inflation figures ticked higher again in January, with consumer prices rising 5.1% from last year. Prices are now rising at their quickest pace since 1991. In other words, so long as you don’t eat, drive a car or own a home there is no inflation.

Speaking of owning a home, shelter costs are now rising at 6.2%. Remember the shelter component of inflation accounts for rent, property taxes, home and mortgage insurance, electricity, and mortgage interest costs. Thanks to falling interest rates over the past couple of years this has kept shelter inflation lower than it otherwise ought to be.

If you turn your attention to the resale market, housing inflation is rampant. National real estate figures released this past week show home prices across Canada are up a record 28% from last year. This far surpasses the previous records created during the 2017 bull market. What’s more alarming is that national prices were up 3% from last month which suggests that house price inflation is actually getting worse, not better. Whoops.

Here are the Annual price increases by city:

Calgary +11.4%
Victoria +24.9%
Greater Toronto +33.3%
Greater Vancouver +18.5%
Ottawa +15.9%
Montreal +22%

I am strongly of the view that an uptick in new listings this spring and rising mortgage rates will begin to slow the housing market. Real Estate is always a lagging indicator, and recent price action in stocks and crypto suggest returns could be muted this year. Let’s watch.

However, over the medium term it remains hard to see how this housing crisis resolves itself. The Federal government just announced they are planning to ramp up immigration targets to 1.3M people over the next 3 years. Yet there is still no housing plan in place. It always amazes me that policy makers continue to suggest all of our housing problems are supply related (new construction) but there is no mention of the supply of people (immigration) nor the supply of credit (cheap money).

In other words, if you’re bullish on government incompetence it pays well to be long housing in this country. After all, everybody wants affordable housing but nobody wants their house to become affordable.

Three Things I’m Watching:

1. Shelter inflation hits 6.2% in Canada. (Source: Scotia Bank)

2. National home prices in Canada ripped 28% higher from last year. (Source: CREA)

3. Used car prices, which are not included in Canadian CPI data are rising at a record clip. (Source: JD Power)

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The Saretsky Report. December 2022