Team Transitory Has Disbanded

Steve Saretsky -

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 demand, and likely the economy with it.

“Did we get everything right? No,” said Macklem. “We have been surprised in particular by the persistent and the pervasiveness of the supply constraints. Inflation now is too high. I think it’s fair to say team transitory has disbanded.”

Yes another 50bps is in the bag come June, completing the rug-pull and setting the stage for another policy error.

Unsurprisingly buyer demand is waning. Greater Vancouver home sales officially fell 34% year-over-year in April, which will make for entertaining news headlines to go along with the surge in interest rates. If you really unpack it further, home sales were right in line with their long term average but that won’t matter from a sentiment perspective.

The hits keep coming too. The city of Vancouver has announced another increase to the empty homes tax, which will rise to 5% starting in 2023. That’s up from the initial 1% when the tax was introduced in 2017. The tax hasn’t made housing any more affordable, but it has filled government coffers. Benchmark home prices are up 31% since the start of 2017, with the government collecting over $105M since the program started. There are 195,000 homes in the city, with only 1600 of those homes deemed vacant last year.

Three Things I’m Watching:

1. Greater Vancouver home sales off 34% from record highs last April. (Source: Steve Saretsky)

2. Mortgage credit growth in Canada surged to a 14 year high. (Source: Edge Analytics)

3. Bond rout continues. (Source: Acorn Macro)

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The Saretsky Report. December 2022