The Canadian housing market continued on its torrid path in September, with home sales ripping to record highs in September. Sales surged 45% on a year-over-year basis. Meanwhile, months of available inventory for sale crashed to 2.6, the lowest total on record during our nations history. This pushed home prices higher, with the average sales price jumping an eye popping 17.5% year-over-year. Keep in mind, the average sales price has been skewed higher as the composition of homes selling has changed. Larger free standing single family homes are selling like hot cakes while condo inventory is accumulating due to a pandemic induced work from home movement.

However, using the home price index, which accounts for a change in sales composition, home prices rose 10%, hitting fresh highs. As shocking as this is, one needs to look no further than the central banks, which have flooded the system with liquidity. The Bank of Canada’s balance sheet has more than tripled since the pandemic. Their weekly purchases of Canada Mortgage Bonds (a proxy for supporting the mortgage market) has grown from $250 million pre-pandemic to over $9 billion as of October.

Ironically, on the same day national home prices surged by double digits, the Bank of Canada also announced they will put an end to the Mortgage Bond purchase program. Evidently, it appears they overshot. The longer term ramifications of house prices rising during a major recession are sure to create speculative feedback loops in the future. Canadians have been taught policy makers will always have their back should any malinvestment go sideways.

The show must go on, and that includes higher immigration targets to sustain the demand for housing. According to a report by Bloomberg, the Canadian government is sticking to its ambitious plans for bringing newcomers into the country, even as its borders remain essentially closed.

Immigration Minister Marco Mendicino is leaning against scaling back the government’s immigration targets for the coming years, according to two people familiar with the matter. That includes bringing in 351,000 new permanent residents in 2021 — the most in a century. Although much of this hinges on the health of the labour market.

Still, it’s true what they say, you can’t teach an old dog new tricks.

Three Things I’m Watching:

1. The Bank of Canada has announced it will wind down its Mortgage Bond purchase program at the end of October.

2. National Home prices hit record highs in September, growing 10% from last year.

3. Canada’s fiscal response dwarfs that of any other country in the G-20.

Cheers,

Steve