DATE

Steve Saretsky -

Despite the market pressuring the Bank of Canada to begin liftoff and start hiking interest rates, they held firm once again this past week. The bank flagged the recent floods in BC and the emergence of the Omicron variant as air cover to stand pat. Per the official release,  “the Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022.” In a follow up speech several days later, deputy governor at the Bank of Canada, Toni Gravelle, blamed supply chain bottlenecks as the root cause for stubbornly high inflation, suggesting these will eventually resolve themselves. There are a couple important takeaways here. First off, let’s be clear, the Bank of Canada has no desire to raise rates. They are delaying as long as possible, trying to find any excuse to keep rates glued to the floor. The emergence of the Omicron variant is likely to provide adequate air

Steve Saretsky -

Happy Monday Morning! We got a string of new data this past week confirming inflation in consumer goods, and housing are proving to be more than transitory. Canada’s consumer price index continued to drift higher with prices hitting an 18 year high, up 4.7% from last October. The recent floods in BC are already creating significant food and fuel shortages which is likely to compound on top of already high prices. Meanwhile, national home prices jumped again, rising a whopping 2.7% month over month in October. This was the fastest price gain in seven months. This gain was led by Toronto where prices ripped 4.8% in one month. Keep in mind these price gains are tracked using a smoothed out hedonically adjusted index which strips out volatility from high-end home sales. In other words, this was a monster move higher that was not due to a change in the composition of homes selling. Policy makers should absolutely be concerned. On the whole, national home prices are now up 23% from last year. To suggest policy makers have over stimulated the economy would be an understatement. The Bank of Canada should absolutely be reigning in stimulus measures but are trying to delay it

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022. “I think there is a risk of getting into the market at today’s rates,” noted Tal. “We are still dealing with emergency interest rates. Let’s remember that these are not normal interest rates and eventually they will rise. If you’re in the market now and you’re thinking about buying this huge house with a huge mortgage, let’s think about it for a second. Can you afford this mortgage if rates will be 10, 150, 200 basis points higher? If not, buy a smaller house or rent.” I can assure you many Canadians can not afford an additional 100 basis points, let alone 200 basis points on their debt. Ironically, Tal’s bank, CIBC, sure isn’t lending like a tsunami of crippling rate hikes are coming. CIBC’s total mortgage growth is running near 14% year-over-year, that’s even higher than during the 2017 bull market when regulators had to ask CIBC to pump the brakes. In other words, Tal’s comments are akin to the old term, watch what they do, not

Steve Saretsky -

The BC Government announced it is looking at several cooling measures for the housing market in 2022. They have highlighted two measures. The first is an end to the blind bidding process, and the other is a mandatory “cooling off period” which will allow any buyer a 7 day recession period to back out of an offer, similar to what is standard in the pre-sale construction market. Let’s discuss. First, an end to the blind bidding system is welcomed, and to be honest, much needed. The existing system relies purely on trust, and let’s be honest, there are a lot of bad actors out there who might occasionally exaggerate on the number of offers on the table. However, what does an end to the blind bidding system look like? It is not a simple change, for if it were, it would have been done a long time ago. My guess is BC will implement something similar to what Ontario has. In Ontario, all bids are registered on the Real Estate Boards back-end system. Buyers agents are able to see how many offers are registered on the property, and from which brokerages. This provides much needed transparency. Second is a mandatory “cooling

Steve Saretsky -

The Bank of Canada continues to slowly drain liquidity after flooding the system with a firehose of cash during the pandemic. Bank of Canada governor Tiff Macklem announced the end of Canada’s QE program (also known as money printing). Furthermore, in Macklems words, “We expect to begin increasing our policy rate sometime between April and September.” Markets are currently pricing in 4-5 rate hikes by the end of 2022. No doubt this has real estate bears frothing at the mouth. The idea of rising inflation forcing the central banks hands would be a dagger to the nations housing market. Perhaps this is welcoming news, given national home prices are now up 22% year-over-year and overvalued on many measures. Higher interest rates would bring some much needed sanity, and hopefully quell rising inflation in the process. However, the exit strategy for the Bank of Canada is going to prove challenging, and the simple equation of higher inflation must equal higher rates might prove illusive this time around. Let’s discuss. First, it’s important to understand monetary policy, particularly in Canada does not work in a vacuum. Monetary policy is globally coordinated, and largely set by the US, the Euro Zone and Japan.

Steve Saretsky -

Consumer price inflation ripped higher in September, surging 4.4% year-over-year, the fastest pace of price increases in 18 years. Let’s discuss this further. We have an inflation problem and the Bank of Canada remains of the view that inflation will be transitory. Although they really can’t say otherwise, for if they did it would only spur a further rise in consumer inflation expectations. After all, inflation is at least partially a psychological phenomenon. In other words, we need to keep the masses calm. This leads us to the next point. Consensus now believes interest rates must rise. After all, inflation is above the Banks mandate, this must mean the Bank will do the noble thing and raise rates? Markets are now pricing in four interest rate hikes from the Bank of Canada by the end of 2022. But wait, it gets even better. The brain trusts at ScotiaBank are now calling for eight rate hikes by the end of 2023. This would bring the overnight interest rate to 2.25%, higher than the previous tightening cycle of 1.75% despite an enormous amount of debt added since the last tightening cycle. Has everyone forgotten that Canada’s total non-financial debt to GDP sits

Steve Saretsky -

It was back to the offer table for Canadian house shoppers. After a brief pause in shopping activity, home buyers returned in September. Sales activity increased 0.9% from August, as new listings declined. Low inventory levels continue to decimate the nations housing market as buyers pick over the scraps. There is just 2.1 months of inventory on a national basis. Just for context, a balanced market requires 4 months of inventory. In other words, new listings have to surge or sales have to plummet just to hopefully get to a balanced market where price growth can moderate. Unfortunately we are nearing the last of the fall market, with new listings expected to take their usual seasonal decline along with home sales. I don’t expect much to change between now and the birth of the spring market in early 2022. Therefor, it’s no surprise that home prices continue to rip, up 1.7% nationally over the past month. Assuming this pace continues (seems unlikely), home price inflation would be running at over 20% annualized, that’s on top of the 21.5% they already increased during the past twelve months. Year-over-year price growth is as follows: Canada +21.5% Toronto +19.1% Montreal +20.8% Vancouver +13.8% Calgary

Steve Saretsky -

We’ve talked a lot about the great reshuffling here. The pandemic changed a lot of things, including where people want to live, and how they want to live. The lust for bigger spaces for less money has driven an exodus away from the city. Recent data from Stats Canada shows Canadians are on the move. Interprovincial migration reached 123,500 people in Q2 2021. This is an increase of 55.1% from the previous quarter, and the largest migration since Q3 1991. Ontario saw the biggest outflows, losing over 11,000 people and marking the largest outflows since the 1980’s. Meanwhile, BC & Nova Scotia enjoyed the largest inflows. To be honest i’m a bit surprised BC remains at the top of the charts. Clearly sky high home prices are not deterring people from moving here. The average home price in BC now stands at a whopping $901,000 a 17.2% increase from last year. There’s really not a lot of affordable options left in BC. Here’s how average home prices stack up across the province, with annual price growth: – Chilliwack $710,238 (increase of 21.3%) – Fraser Valley $984,965 (increase of 20%) – Greater Vancouver $1,174,176 (increase of 8.9%) – Kamloops $558,291 (increase of 21.9%)

Steve Saretsky -

It took over $600 million of tax pay dollars to reach the same outcome, another liberal minority government. I can think of a few better places to spend $600 million, affordable housing supply being one of them. Nonetheless, what’s done is done, and we now have some clarity on the direction of government and how they plan to address housing in the years ahead. Here’s a summary of the housing plan the liberals campaigned on: Ban foreign money from purchasing a non-recreational, residential property in Canada for the next two years, unless this purchase is confirmed to be for future employment or immigration in the next two years. Introduce a new Rent-to-Own program, provide $1B in loans and grants to develop and scale up rent-to-own projects Establish an anti-flipping tax on residential properties, requiring properties to be held for at least 12 months. Reduce the price charged by the Canadian Mortgage and Housing Corporation on mortgage insurance by 25%. For a typical person, this will save $6,100. increase the insured mortgage cut-off from $1 million to $1.25 million, and index this to inflation invest $4 billion in a Housing Accelerator Fund which will grow the annual housing supply in the

Steve Saretsky -

CPI inflation ripped, hitting 4.1% in August. Inflation in Canada is now accelerating at its fastest pace since 2003. The homeowners’ replacement cost index, which is related to the price of new homes, continued to trend upward, rising 14.3% year over year in August—the largest yearly increase since September 1987. Meanwhile, borrowing costs continue to fall. Several of the large Canadian banks slashed their five year fixed rate mortgages, with TD cutting theirs by 40bps to 1.99%. In other words, the REAL cost of borrowing, when adjusted for inflation is negative 2%. If you’re taking out a variable rate mortgage, which sits at about 1.29%, you are looking at a real negative interest rate of nearly 3%. It is simple math, Canadians are essentially being paid to take on debt, it is therefor no surprise to see mortgage loan growth at 10 year highs and national home prices up 21% as of the end of August. Keep the above paragraph in mind as we move on to some election talk. Negative interest rates and the financialization of housing are largely a function of the global financial system and are not in the purview of Justin Trudeau, Erin O’Toole, or even Jagmeet

Steve Saretsky -

The Bank of Canada provided guidance for how it plans to eventually remove stimulus, saying it will first raise interest rates before curbing its holdings of government bonds. The Bank has been using two major policies for suppressing interest rates, first by leaving its overnight policy rate near zero, and secondly by purchasing hundreds of billions of government bonds. Macklem and co believe they’ll start gradually raising interest rates sometime in 2022. My question is how? As of Q4 2020, Canada’s total credit to the non-financial sector sits at a staggering 359% of GDP according to the Bank of International Settlements. This is one of the highest totals in the G-20, right alongside Japan. The Japanese economy has been suffering under a mountain of debt for decades, with current credit to non-financial sector debt sitting at 418% of GDP.  In other words they’re caught in a debt trap and haven’t been able to raise interest rates for over two decades. The Bank of Japan has been forced to keep interest rates pinned to the floor, requiring them to soak up government debt in order to keep bond yields and thus borrowing costs stable. The BoJ now owns over 48% of

Steve Saretsky -

Statistics Canada has revised the latest reading on GDP, highlighting a contraction of 1.1% at an annualized rate in the second quarter, well below the 2.5% expansion forecasted in a Bloomberg survey of economists. It’s a big miss, and one that does not bode well for the Trudeau Government as we head to the polls in less than three weeks. The Canadian economy is currently suffering a bout of stagflation, with CPI inflation currently running at a 10 year high as the economy contracts. This is one of those nightmare scenarios not only for the Trudeau Government but the Bank of Canada as well. Pretty hard to pare back stimulus with a big miss on GDP. The official narrative on inflation is that it remains nothing to be worried about, “transitory” as they like to say. However, with covid lingering around it appears supply chain impairments are going to persist, and inflationary pressures will remain. As my good friend Ben Rabidoux just pointed out, the Canada Farm Product Price Index, which measures the change in prices that farmers receive for the agriculture commodities they produce and sell, has surged 24.4% y/y in June, tied for highest reading since late 1970s. In

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The Canadian Economy

Steve Saretsky -

Despite the market pressuring the Bank of Canada to begin liftoff and start hiking interest rates, they held firm once again this past week. The bank flagged the recent floods in BC and the emergence of the Omicron variant as air cover to stand pat. Per the official release,  “the...

Steve Saretsky -

Happy Monday Morning! We got a string of new data this past week confirming inflation in consumer goods, and housing are proving to be more than transitory. Canada’s consumer price index continued to drift higher with prices hitting an 18 year high, up 4.7% from last October. The recent floods in BC...

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022. “I think there is a risk of getting into the market at today’s rates,” noted Tal....

Steve Saretsky -

The BC Government announced it is looking at several cooling measures for the housing market in 2022. They have highlighted two measures. The first is an end to the blind bidding process, and the other is a mandatory “cooling off period” which will allow any buyer a 7 day recession...

Steve Saretsky -

The Bank of Canada continues to slowly drain liquidity after flooding the system with a firehose of cash during the pandemic. Bank of Canada governor Tiff Macklem announced the end of Canada’s QE program (also known as money printing). Furthermore, in Macklems words, “We expect to begin increasing our policy...

Steve Saretsky -

Consumer price inflation ripped higher in September, surging 4.4% year-over-year, the fastest pace of price increases in 18 years. Let’s discuss this further. We have an inflation problem and the Bank of Canada remains of the view that inflation will be transitory. Although they really can’t say otherwise, for if...

Steve Saretsky -

It was back to the offer table for Canadian house shoppers. After a brief pause in shopping activity, home buyers returned in September. Sales activity increased 0.9% from August, as new listings declined. Low inventory levels continue to decimate the nations housing market as buyers pick over the scraps. There is...

Steve Saretsky -

We’ve talked a lot about the great reshuffling here. The pandemic changed a lot of things, including where people want to live, and how they want to live. The lust for bigger spaces for less money has driven an exodus away from the city. Recent data from Stats Canada shows...

Steve Saretsky -

It took over $600 million of tax pay dollars to reach the same outcome, another liberal minority government. I can think of a few better places to spend $600 million, affordable housing supply being one of them. Nonetheless, what’s done is done, and we now have some clarity on the...

Steve Saretsky -

CPI inflation ripped, hitting 4.1% in August. Inflation in Canada is now accelerating at its fastest pace since 2003. The homeowners’ replacement cost index, which is related to the price of new homes, continued to trend upward, rising 14.3% year over year in August—the largest yearly increase since September 1987. Meanwhile,...

Steve Saretsky -

The Bank of Canada provided guidance for how it plans to eventually remove stimulus, saying it will first raise interest rates before curbing its holdings of government bonds. The Bank has been using two major policies for suppressing interest rates, first by leaving its overnight policy rate near zero, and...

Steve Saretsky -

Statistics Canada has revised the latest reading on GDP, highlighting a contraction of 1.1% at an annualized rate in the second quarter, well below the 2.5% expansion forecasted in a Bloomberg survey of economists. It’s a big miss, and one that does not bode well for the Trudeau Government as...

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The Saretsky Report. December 2022