Bank of Canada Governor Doesn’t See A Property Bubble, But He Did In 2013

The Bank of Canada (BoC) head recently dismissed the need to cool real estate prices. Governor Tiff Macklem seems like he doesn’t want to say anything controversial… or he’s one of those people that thinks real estate prices only go up. That wasn’t the case back in 2013, when he served in the central bank’s number two role.  

During his tenure as deputy governor, he warned about Canada’s addiction to real estate. In a 2013 speech, Macklem ripped on everything from overvaluation to GDP concentration. So what changed? Did things improve, or has ignoring the problem for almost a decade produced a situation too fragile to touch? Has everyone in charge just decided they don’t want to be the pin that pops the bubble? Let’s dive into his concerns back then, and how those indicators look today.

Canadian Real Estate Showed Signs of “Overvaluation” 

In his former role, Governor Macklem felt home prices were overvalued. “Over the past decade, the price of the average home has risen from 3.5 times disposable income to more than 5 times.” Adding, “Housing activity in Canada is at a near record share of GDP, and there are indications of overbuilding and overvaluation in some segments of the housing market.” 

Let’s quickly unpack how those indicators look today. The average home price was a concern to him at 5x disposable income in 2013. Today that number is over 15x, and that’s just at the national level. In Toronto and Vancouver, it’s much higher. Somehow, tripling a level of “overvaluation” is just a slight sign of overheating. 

Another concern is housing represented way too large a share of GDP. That didn’t get better, it got much worse. Residential investment was around 6.5% of GDP in 2013, when he expressed his concern. In Q3 2020, residential investment jumped to almost 9.5% of GDP, meaning it consumes 46% more of the economy today. 

In 2013, it was concerning to approach a record high. Today it’s “good for the economy” that it smashed the record? Canada’s residential investment as a share of GDP is now so high, it can’t see the US housing bubble without a telescope.

Investors Driving The Real Estate Market Made It Vulnerable

In the same speech, Macklem also said prices were being driven by investors creating speculative demand. “The total number of housing units under construction is now well above its average relative to population… there is also abundant anecdotal evidence that building has been spurred by investor demand, and is therefore more susceptible to changes in buyer sentiment.” 

Canadian real estate was barely on the map of speculators at that time. It’s currently one of the most sought after markets for investment. In 2018, almost half of Toronto real estate investors bought negative cap condos.

Negative caps are when the market rent a tenant pays, is lower than the carrying costs of the unit. Every month the owner tops up the costs, with the hope prices rise more to make up the difference. Currently, rents are falling across the country as home prices are rising. This would likely mean the investment situation is even worse today. It also probably extends much further out of Toronto as well.

Household Indebtedness Was A Top Concern

High levels of household debt were a top concern. “Household indebtedness is elevated and a range of indicators suggest that some segments of the housing market exhibit stretched valuations and overbuilding… In the last 10 years, the pace of household debt accumulation has been unusually rapid. Household debt relative to disposable income increased about three times faster in the last 10 years than in the previous decade.” 

The rate of mortgage credit growth has been larger, but it’s much higher than when he was concerned. The annual rate of growth in January 2013, when he made this speech, was 5.12%  for mortgage credit. The last reported numbers in January 2021 show annual growth at 7.19%, a rate that’s a touch over 40% higher. I guess it was bad credit then, but it’s good credit now.

Canada Didn’t Dodge The Great Recession, It’s A Different Market

One of the most important parts of that speech wasn’t about housing, but reminding people Canada is not the US. Not how most people would guess either. Macklem emphasized Canada can’t take credit for dodging the Great Recession, because “we had our crises earlier. In the 1970s, we lost our monetary anchor, and suffered the harmful consequences of high and variable inflation. In the mid-1980s, two Canadian banks failed and two more were saved only by merging with larger institutions. In the mid-1990s, contagion from the Mexican peso crisis caused foreign investors to wake up to Canada’s precarious fiscal situation, and we suffered our own sovereign debt crisis.”

Before adding, “Where we can take credit is that we learned from our mistakes. In the aftermath of each of these crises, we put in place sound policy frameworks.”  Housing is obviously something excluded from the mistakes we learn from, and developing sound policy frameworks. 

Did the outlook improve? No, things actually got much worse over time. The dependence of the country’s economy on housing became even deeper. Politicians and bureaucrats took the easy path, and kicked the can down the road.

What would happen if he repeated even half the points of his 2013 speech today? It’s better to just shut up, and say we need the growth. It’s easier to wait until this turns into a systemic crisis, and claim no one saw this coming. Except for that time in 2013, when he literally warned everyone this was coming.

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  • Trader Jim 3 years ago

    Today a deputy from the BOC said they’re possibly tapering QE by next month. They know the system is really broken, but acknowledging it means they would be considered responsible for all of the people paying 30% higher prices.

    The market will cool gently, and people will assume this is just demand normalization, but it’s really them pulling on the levers.

    • Ahmed 3 years ago

      That was the only non-canned response. They know the market is watching for any move they make.

  • James Wilson 3 years ago

    Poloz also warned about Canada’s housing industry becoming too big to fail in 2013. There’s a definite muzzling vibe happening here.

    I purchased that year. I don’t know if I would do the same when they say the market is fine. Says a lot about their level of honesty.

  • Kate 3 years ago

    Ha ha he is blind person.

    • Liam 3 years ago

      Being blind would mean he didn’t see this coming. He did. What he’s doing is dishonest, because he values his position more than honest advice.

    • V 3 years ago

      The people running things are definitely invested in Real Estate as well. They want to retire with a million dollar home!
      They know family members who own Real Estate. It’s called bias opinion and they’re all bias because they all own property! Let’s get down to the fundamentals of it all, it’s called corruption. Nothing more, nothing less!

  • Tom Wolfe 3 years ago

    Great post Stephen. The pattern will repeat. 2013, 2021, I can’t image 2029. A nice house in the suburbs might be $15,000,000 with property taxes of $100,000. Hopefully the average Canadian income is able to keep up. The average hourly wage in was $22 in 2013 and its $28 today. Not really a hockey stick graph yet.

    In the meantime, if the Governor were to resign maybe Nero would be a good replacement, at least we’d understand the end game. Or possibly the BOC might dust off that ol’ chestnut A Modest Proposal by Jonathan Swift from 1729, that suggests the poor could ease their burden by selling their children as food for the rich.

  • The Truth Shall Set You Free 3 years ago

    Funny how depending on who your ‘boss’ is how your position changes.

  • Sam 3 years ago

    Is this shift from Macklem, Poloz more to do with a shift in outlook, meaning a more traditional approach to managing Monetary Policy toward a more Modern Monetary Theory paradigm?

    It just seems like the BOC has gone to crazy levels of recklessness with the QE program. What if there is a run on defaults? They have to know that artificially suppressing interest rates can’t hold forever. What if rates rise, defaults skyrocket……? Isn’t the BOC stuck holding a ton of worthless MBS’s? Are they thinking they can just print-money their way out of it?

    • Sam 3 years ago

      I’m beginning to wonder if what we’re experiencing with our Government concerning not just housing, but our entire economy as well as Government spending, is a shift toward a MMT outlook. Someone correct me if I’m wrong.

      • Jimay 3 years ago

        You are not wrong. The western world shifted to MMT after the 2008 crash. It was supoosed to be temporary but now we are trapped.

  • Ashley 3 years ago

    Even if Canada is shifting towards MMT, the money needs to flow into other sectors of the economy for the economy to achieve sustainability and low unemployment. However, in Canadian economy all the money is stuck in one asset – housing. MMT cites example of Japan, however Japan has much cheaper housing and much higher salaries, in Canada it is exactly opposite. To me it seems govt. is just running directionless without any leadership.

    • Ada 3 years ago

      It’s all going into housing because other than oil and housing we have a weak economy built off of massive debt. We let all of our manufacturing leave the country, which was a big mistake exposed by covid, resulting supply chain issues. We don’t even have the capacity to manufacture vaccines. And now with these stupid high house prices, stagnant wages, and inflation we will experience a massive brain drain like no other. All because these politicians refused to let housing correct 10+ years ago and failed to protect our manufacturing industries.

  • Arthur 3 years ago

    I imagine that the Governor was and is too busy to write detailed speeches for public consumption. It may be time to share some credit with those economists at Bank of Canada that contribute their views on the economy. Also BofC officers providing a personal disclaimer on any personal real estate investment holdings beyond their personal residences would be helpful is assessing these types of speeches.

  • Kevyn 3 years ago

    Well you need a crisis to print money.
    What’s the next crisis after the pandemic

  • House Wealth 3 years ago

    “I will do whatever is necessary to protect your housing wealth” – Morneau

    • Ada 3 years ago

      That says it all right there. System is rigged to the core. There is no free market when it comes to housing.

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