More monetary tightening is heading our way this week with the Bank of Canada fully expected to hike interest rates another 50bps on Wednesday. Assuming they do indeed hike rates by 50bps on Wednesday, Markets are still pricing in another 125bps of tightening by the end of the year. Of course, much of this depends on the direction of housing. As my friend Ben Rabidoux notes, over the past 5 years, residential housing and consumption accounts for over 80% of Real GDP growth in Canada. In other words, housing and the knock-on effects of this sector ultimately drive growth and a good chunk of inflation. Policy makers are aware of this, and it’s why they are intentionally targeting a reverse wealth-effect. They want to make you less wealthy so you spend less and drive inflation lower. This is not a conspiracy theory, central bankers are openly discussing it in the media. So, let’s turn our attention to housing. I remain of the view that housing is weaker than policy makers are likely aware of. Greater Vancouver home sales are on pace to finish nearly 20% below their long term historical average for the month of May. We are only three

It was another volatile week for financial markets. Nearly $11 trillion was erased from global equity values. If you start adding the bond and crypto markets we have $35 trillion in wealth that has evaporated. I’m often asked where is all the money coming from? How are people coming up with the down payments for $2M homes in Vancouver? I can assure you they are not working a 9-5 job and saving for twenty years, they are often cashing in gains from other financial assets. In other words, the correlation between falling stock prices and housing demand is not zero. What’s more concerning is this is all par for the course, according to the worlds most influential central bank. The Fed is targeting a reverse wealth-effect, explicitly trying to drive down asset prices in order to slow inflation. You see, the Fed can’t pump more oil, harvest more wheat, or fix supply chains, but they can influence financial conditions by raising rates, lowering asset prices and ensuring people have less money to spend. Remember, last month Bill Dudley, the former president of the Federal Reserve Bank of New York, said if financial conditions don’t tighten on their own, “the Fed

We need higher rates to moderate demand, including demand in the housing market. Housing price growth is unsustainably strong in Canada. That was the message from senior deputy governor of the Bank of Canada, Carolyn Rogers this past week. Yes, the central banks continues to talk up further rate hikes, with the goal of slowing housing in the process. As we’ve been talking about in this newsletter for several weeks now, mission accomplished. Housing activity is slowing at a rapid pace, with further data from the always insightful Ron Butler of Butler Mortgages, confirming what we already know. The 3 Mortgage Insurers in Canada: CMHC, Sagen and Canada Guaranty are down nearly 40% on unit application volume for the month of April. This shouldn’t be surprising considering the lowest 5 year fixed nationally-available uninsured mortgage is now north of 4% for the first time since 2010. Demand destruction is well underway, and house prices are already dropping in parts of the market, mostly in frothy suburban neighbourhoods. A few things worth keeping an eye on moving forward. Many borrowers are about to see their mortgage rates double this year. You see, alternative lenders like Home Capital and Equitable Group issue the

No regrets. That was the message from Bank of Canada governor Tiff Macklem when asked about his broken promise on holding rates at zero until the end of 2023. If you recall, in July 2020 Macklem gave the green light for Canadians to speculate on housing, announcing “If you’ve got a mortgage, or if you’re considering to make a major purchase, or you’re a business and you’re considering making an investment, you can be confident that interest rates will be low for a long time.” Oops. I’ll never forget when I heard these comments, it was the most obvious signal that housing was about to rip, and it did. National house price growth ripped as high as 26% on an annual basis, surpassing all previous inflationary housing booms. Throughout the entire bull market Macklem and Co determined it was simply a bit of pent-up demand that would ease. Mortgage credit growth continued to run, hitting 10 year highs, and M2 money supply growth surged by over 20%. Somehow, despite the over 300 economic research staff at the Bank of Canada they all missed the housing and inflation boom. Now come the repercussions, rates must go up in order to kill