Canadians continue to plow money into the Real Estate market. According to Stats Canada, Gross residential investment surged to an unprecedented $160.2 billion in the third quarter, almost 9% more than the previous quarterly record of $147.5 billion at the end of 2017. Per a recent article from the Financial Post, housing accounted for 37% of overall investment, while business spending on machinery and equipment and intellectual property dropped to 28.2%, the highest and lowest levels, respectively, since early 1993. These figures are symptomatic of an economy on life support, drowning in a sea of debt. Why start a business when you can get rich by purchasing a condo or two? The pandemic has only re-enforced these perceptions. Look around you and businesses are suffering while house prices continue to surge higher. Magical asset inflation is slowly eroding societies confidence in our institutions. While policy makers are avoiding discussing the elephant in the room, a recent interview from former Prime Minister Stephen Harper says it all. In case you missed it, Stephen Harper did an hour long podcast with Cambridge House, a Canadian investment firm. While his comments are nothing new to people paying attention in the finance space, they

Bank of Canada governor Tiff Macklem says he’s not worried about a housing bubble. His comments follow the banks decision this past week to maintain current stimulus, keeping rates at 0.25% and continuing their QE program which is currently running at a pace of $4B per week. These programs will remain in place until the recovery is “well underway.” Make no mistake, the current froth emanating out of the housing market is a result of the banks actions, whether they want to take responsibility for it or not. Ironically, Macklem flagged the housing market as a key risk back in 2013 when he was deputy governor at the Bank of Canada. In 2013, Macklem publicly stated the growth in household debt and house prices was “not sustainable”. Since then, national home prices, as measured by the home price index, shows home prices are up 71%, an average annual growth rate of just over 10%. In other words, you’ve had double digit house price inflation, yet the banks official CPI inflation metric suggests annual inflation has miserably failed to hit their mandated 2% target. Perhaps we are measuring inflation incorrectly? However, don’t expect any sudden revelation from the central bank. With inflation

Last week we discussed the ongoing dispute in New Zealand, where the finance minister has been arguing with the head of the central bank to consider house prices in their central bank monetary policy framework. Like nearly everywhere else in the world, New Zealand is grappling with a severe housing affordability crisis. Despite pulling numerous policy levers, house prices continue to inflate. The last lever, raising interest rates, remains off the table. Things have only gotten worse during the pandemic. “We’ve probably seen the biggest widening of wealth distribution that we have ever seen in New Zealand between people who own houses and those who don’t,” said Arthur Grimes, professor of public policy at Victoria University of Wellington. According to the Real Estate Institute of New Zealand, the median house price in New Zealand has surged nearly 20% this year. Ironically, in 2018, new elected Prime Minister Jacinda Ardern fulfilled her election promise of banning sales of residential housing to foreign buyers. Clearly that wasn’t the solution. New Zealand’s problems are not unique. The same discussions are ongoing in Canada. Home prices are up double digits this year, despite record job losses. The wealth gap continues to widen, prompting the Trudeau Government

It’s no surprise that a decade of zero interest rate policy has inflated housing prices across the globe. The result is a growing wealth gap, and social discontent. This discontent has reached a boiling point in New Zealand, where finance minister Grant Robertson has asked the Reserve Bank of New Zealand to step in and rein in the surge in home prices. The Finance minister of New Zealand has asked the central bank to consider stabilizing house prices as a factor for consideration when formulating monetary policy. That request, however, fell on deaf ears. “Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency.” Rebuked Reserve Bank of New Zealand Governor Adrian Orr. Adding, “Targeting higher interest rates to cool housing would lead to lower employment, which most affects those at the margins of the labor market. Other trade-offs could be a higher New Zealand dollar exchange rate and lower growth in housing supply.” In other words, not our problem. You see, policy makers are caught in a catch 22. Asset prices drive the economy, not the other way around. Asset prices now rely on continued stimulus, remove

As the pandemic rages on, and government mandated shut-downs ramp up, Canadians have a bit more spare time this holiday season. Bored and stuck at home, Canadians are doing what they do best, buy real estate. In what is normally considered the slowest time of the year for residential real estate, buyers have been incredibly active this year. It is expected that 2020 will mark a new record high for annual home sales across Canada, once December figures come out. And while we don’t have the national data for December just yet, real-time data out of Vancouver provides some early indications for the rest of the country. As of December 27th, there have been over 2700 sales across Greater Vancouver, putting us on pace to surpass the previous record of just over 2800 home sales set in December 2015. (Prices were rising near 20% annually back in December 2015). New listings are also coming on at an unusual pace for this time of year, and will set record highs here in December. Although, as has been the trend throughout 2020, sales continue to outpace new listings, squeezing inventory levels lower and pushing prices higher. The home price index for Greater

The sovereign debt bubble continues to expand, with Government debt around the world inching closer towards the $18 trillion dollar mark. With global central banks essentially nationalizing bond markets, investors continue to pile into alternative assets. Of course housing has been one of the largest benefactors during this hunt for yield, and the pandemic has only compounded returns for homeowners. In fact, American homeowners are $1 trillion richer as the pandemic-driven housing boom pads their pockets. According to data from CoreLogic, in the past year, homeowners with mortgages, representing about 63% of all properties, have seen their equity increase by 10.8%. That equates to a collective $1 trillion in gained equity, or an average of $17,000 per homeowner, the largest equity gain in more than six years. This gilded recession is not exclusive to the United States. North of the border, Canadian homeowners are also flourishing. According to third quarter data released this past week by Stats Canada, the nation’s households have seen their net worth jump by more than C$600 billion since the end of last year. Despite three million Canadians losing their job, a plunge in debt servicing costs and government support have pushed per capita household net worth to

The big six banks are flush with cash. At least that was the headline promoted by BNN Bloomberg this past week. Adding, “When shares of the banks began rallying on Oct. 29, investors were buying because they believed the banks’ outlook on credit quality was about to take a sharply positive turn.  And they were right. Each of the big banks decided to set aside – or “provision” – much less money than they did just a quarter ago for an anticipated wave of loans slipping into default because of the economic shock from COVID-19. In fact, each of the banks cut provisions for credit losses (PCL) by more than analysts had forecast. Because every dollar of a PCL is a dollar lost to the net income line, earnings per share topped expectations in every case.” This crisis has become a classic coin toss for the banks, heads I win, tails you lose. Through federal government support, and generous asset purchases from the Bank of Canada, the Canadian banks are in a significantly better spot than initially feared at the start of the pandemic. In fact, they have become the cornerstone for the remarkable housing boom underway across the nation. Canadian

The flight to the suburbs has become all the rage these days. Since the onset of the pandemic, there has been a mass migration out of dense urban cities and into the sprawling suburbs. The ability to work from home, while providing more space, at a more affordable price point, has become irresistible for many. While the shift in home buyer preferences has been garnering plenty of media headlines these days, the reality is this trend was already underway. It has merely been throttled into overdrive over the past six months. This really isn’t that hard to understand though. The cost of living has inflated over the years, far quicker than wages. An era of near zero interest rates, combined with a decade of quantitative easing has pushed asset prices through the roof, including housing. Remember, a key function of quantitive easing is to push asset prices higher. As defined by the Bank of England, “QE works by making it cheaper for households and businesses to borrow money – encouraging spending. In addition, QE can stimulate the economy by boosting a wide range of financial asset prices.” Mission accomplished. This has forced homebuyers, particularly younger ones, further away from expensive cities,

Happy Monday Morning! Official data released by the Canadian Real Estate Association this past week highlighted a continuation of a blazing real estate market, ripping across the nation. Home sales across Canada jumped 32% year-over-year in October, it was the busiest month of October on record. Sales were up, and inventory for sale continued to shrink. There was just 2.5 months of inventory on a national basis at the end of October 2020 – the lowest reading on record for this measure. At the local market level, some 18 Ontario markets were under one month of inventory at the end of October. The widely anticipated housing crash has, so far, failed to materialize. Although, given the unprecedented levels of monetary and fiscal support, it really isn’t that hard to believe when you think about it. Thanks to generous support programs and a sea of liquidity printed by the Bank of Canada, Canadian households are sitting on $90B of excess cash since the pandemic. Furthermore, Canada’s M2 Money supply growth has grown by nearly 15% so far this year. Just to clarify, M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. Central banks

The much hyped mortgage deferral cliff is nearing. At the height of the pandemic, Canadian banks provided nearly 795,000 homeowners with some form of mortgage payment flexibility. In other words, at one point or another, 16% of all mortgages outstanding received a payment deferral. It only takes a small fraction of those deferrals to push the delinquency rate meaningfully higher. Remember, research from National Bank suggested that if 5% of those deferrals failed to resume payments it would lift the 90-day arrears rate from 0.24% to about 0.95%. That would bring the default rate close to the Bank of Canada’s “pessimistic” scenario for the second half of next year. That default rate would be similar to the early 1980s when just over 1% of mortgage borrowers went into arrears, also known as 90-day delinquencies, ultimately dragging the real estate market down with it. That period remains the highest era for delinquencies to date. Now that the recent wave of mortgage deferrals are expiring, we are starting to get a glimpse behind the curtains from some of our banks. Home Capital Group, Canada’s largest alternative lender, has shrunk their number of loans in deferral by 97% as of the end of October. The company had granted a two-month

Well, it didn’t take long. Canadians confidence in the Real Estate market has returned to pre-pandemic levels. Bloombergs often quoted Nanos Research survey shows 45% of respondents now believe the value of real estate in their neighborhood will increase over the next six months, that’s the highest reading since the country implemented rolling lockdowns. Naturally, that optimism is showing up in the latest sales figures across major metro cities. Early reporting out of Vancouver, Toronto, and Calgary suggest national home sales and prices will continue their bounce higher. In Vancouver, home sales in October jumped 29% year-over-year, it was the busiest October since 2009. In Toronto, the average sales price hit a new record high, up 13.7% from last year. Even the depressed housing market in Calgary received a COVID boost with sales up 23% and the MLS benchmark price increasing 0.6% year-over-year, the first annual increase in three years. Of course it’s not all butterflies and rainbows, despite recent optimism. The housing boom has been uneven, creating obvious winners and losers. A glut of condos is quickly building across the nation, potentially putting the cinderella story of an impenetrable housing market in jeopardy. With people fleeing condos for more space, and

The Bank of Canada now owns over 30% of the Canadian bond market, and at its current pace will own over 50% of the bond market by this time next year. It’s no surprise that the central banks actions are now coming under increasing scrutiny, particularly from opposing lawmakers. There are growing concerns the central bank is financing government spending beyond COVID-19 emergency measures. Some are calling it the early stages of MMT (Modern Monetary Theory), a radical policy idea which ultimately suggests that there are no limits on fiscal spending when you have a central bank which can print money in your own currency. An idea, which finance minister Chrystia Freeland was quick to dismiss despite saying fiscal anchors, which constrain spending, will only be re instituted once the pandemic has passed. “I am not among those who think Canada should have a fling with Modern Monetary Theory, which holds that deficits don’t matter for a government that issues debt in its own currency.” Still, the lines are becoming increasingly blurry between the actions of the federal government and the central bank. It appears to have prompted the Bank of Canada to dial back its QE (money printing program)