Arsonist & Firefighter

Steve Saretsky -

For the first time in over 20 years, the Bank of Canada raised rates by over 50bps at their most recent meeting. Everyone is panicking, inflation is here and the Bank of Canada is acting tough, they’re no longer going to support the housing market, so naturally a housing crash is just around the corner, right?

Keep in mind, the big brains at the Bank of Canada were dead wrong on inflation being transitory over a year ago. They were also completely wrong on the housing boom just being a short burst of “pent-up demand”. Now they are telling you they are going to fight inflation, that the economy can handle higher interest rates and housing activity will simply moderate, no drop in home prices. Really?

Have we all forgotten that Canada’s total non-financial debt to GDP is north of 350%? In other words, you can’t fight inflation without trigger the debt bomb. At some point they’ll have to choose between inflation and financial stability. In simpler terms, it sounds like the Bank of Canada is determined to keep raising interest rates until something breaks in financial markets. My opinion is that something will break much sooner than they are leading on. Mortgage rates in Canada are now north of 4% and housing activity is slowing tremendously. Remember in 2018 mortgage rates nearly hit 4% and sales activity in Greater Vancouver fell to an eighteen year low and in the GTA they tumbled to a ten year low. Will this time be any different?

According to the Bank of Canada there is nothing to worry about because everyone has been stress-tested at higher rates. What they’re failing to consider is that the mortgage stress test has become somewhat of a joke. When nearly every first time home buyer needs a parent to co-sign on the mortgage, along with a $100k down payment gift, are we really stress testing little Johnny?

You see, the Bank of Canada is both arsonist and firefighter. They ignited a housing boom at the onset of the pandemic by pushing interest rates to zero and running a massive QE program. Using forward guidance they ensured Canadians “interest rates would remain low for a very very long time”. Talk about your all-time rug pulls.

What you need to take away form this is they are about to create another arson, forcing them to pull out their firehouses later on. No sense in getting in the way, better off to stay liquid and pick up the charred scraps in the aftermath. Like I said, home sales activity has already dropped off precipitously, and home prices are beginning to follow suit. In the suburbs, detached and townhomes are already off 5-10% form their highs just two months ago. This won’t show up on the banks radar for another 4-6 months minimum. Don’t shoot the messenger, it is what it is.

Three Things I’m Watching:

1. Canadians have been funnelling into variable rate mortgages since the pandemic, on the belief rates would stay low for a “very very long time” (Source: The Globe & Mail)

2. Blaming investors, yet prices are lower in the areas most owned by investors. (Source: Leo Spalteholz)

3. Top 1% of income earners by city in Canada. (Source: Stats Canada)

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The Saretsky Report. December 2022