Bank of Canada Is Misleading, Low Rates Drove Real Estate To Bubble Territory: BMO

A Canadian Big Six bank took on a key narrative from the central bank in a research note to clients this weekend. BMO Capital Markets‘  Rates and Macro Strategist Benjamin Reitzes addressed remarks from the Bank of Canada (BoC) Governor Tiff Macklem. Last week the Governor said high inflation was a supply issue, and low rates did not raise demand. Reizes found this particularly odd, especially when it comes to real estate sales (and prices). BMO not only disagreed with the BoC, but flat out said the central bank’s low rate policy drove real estate towards a bubble.

Low Rates Drove Canadian Real Estate Prices To Borderline Bubble

The BoC has been arguing low interest rates are needed until the output gap is closed. An output gap is the difference between an economy’s actual output and its potential output, before it becomes inflationary. The BoC is taking an odd position, considering artificial restrictions to manage public health are in play. The position is stranger when all signs the gap has become inflationary are dismissed. A misread from the BoC seems to be common consensus, even amongst the country’s big banks

“The BoC’s insistence on keeping policy at the lower bound until the output gap is closed has contributed to the 5% and rising pace of inflation, and fueled wild growth in home prices bordering on bubble territory,” says Reitzes.

Bank of Canada Sees No Demand Problem, Not Enough Supply

The BoC Governor is digging into their narrative — it’s a supply issue, not an issue of low rates creating too much demand. “With the economy just back to its potential output, the elevated inflation we are experiencing today is not the result of too much demand in the economy,” said Governor Macklem last week.

The narrative is more problematic than it sounds. If there is a supply-side problem related to global supply chains, rising rates doesn’t fix it. One needs to simply wait until these issues are resolved and then prices come down. But if they’re wrong, raising interest rates takes 18 to 24 months to fully hit the market, meaning inflation relief is far away. 

The US Federal Reserve used to play up the transitory inflation narrative, but killed it at the end of last year. They quickly adopted the stance that elevated inflation is a monetary policy issue. US President Biden even backed the sentiment, saying inflation is a central bank issue

Canada started to adopt this opinion, before quickly abandoning it after a few days. The BoC is now managing monetary policy in a similar fashion to the US. Though officially, the US says inflation is a monetary policy issue while Canada disagrees. Canada must just be raising rates for fun, with no impact on demand. 

BMO Disagrees, Demand Is Very Much Elevated By BoC Policy

Referring to Governor Macklem’s above quote, BMO appears almost confused by his remarks. “It’s hard to believe that housing and goods demand hasn’t been juiced by policy rates sitting at the lower bound,” says Reitzes.

The lower bound is a level of the overnight rate maintained to stimulate demand. This level of interest is used to raise consumption and demand. The excess demand becomes very apparent when looking at housing. “On the housing front, it’s no accident that demand has shifted to variable rates from fixed rates, as the former have been materially lower,” he said.

He doesn’t elaborate, but this is an interesting point many economists highlight. Rising bond yields drove fixed-rate borrowing costs higher. Higher borrowing costs are supposed to slow demand, but that didn’t happen this time. Canadian mortgage borrowers opted for variable-rate mortgages instead.

Canadian variable-rate mortgages are largely based on the BoC’s overnight rate. Instead of demand slowing, buyers targeted the BoC’s loose overnight policy. Variable-rate mortgages used to be a small segment of borrowing in Canada. Now it represents the majority, a clear sign loose policy is supporting demand to some extent.

Low Rates Drove $150 Billion In Excess Home Sales Demand

A few months ago, BMO estimated the excess demand for home sales due to low interest rates to be significant. They used 15 years of data to create a trend, and found excess annual home sales reached $150 billion in October. That’s not all sales, but just the excess — which reached the equivalent of 6% of GDP

The cost of interest and the share of investors in the market should be a clear sign of excess demand as well. Borrowing costs are at negative real rates, meaning inflation is higher than interest. This rarely occurs, but if you’re an investor you’re staring at free money in the short-term. It’s not a coincidence that investors are now a larger share of buyers than first-time buyers.

“Simply, interest rates are a big determinant of demand no matter what the BoC would have you believe,” says Reitzes. 

The recent challenge of the BoC’s statements is just the latest episode of, “What The Hell Are You Talking About, Macklem?” Almost a year ago, statements from the central bank stopped making sense when contrasted with data. One bank questioned why the BoC is “discrediting” its own inflation research. More recently, Canada’s largest bank made the highly unusual move of the CEO advocating for an interest rate hike. Let this sink in for a moment. How odd does the BoC have to act for banks to basically say the central bank is creating excess business for them? One would have to guess it’s getting close to reckless. 

“While the Bank of Canada probably should have started lifting rates months ago … better late than never,” says Reitzes.



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  • Liam 2 years ago

    How do more people not realize inflation is a tax running high to balance the spend over the past few years? As soon as it’s repaid, they’ll try to curb it and pretend nothing happened since the average person doesn’t have the slightest clue.

    • RW 2 years ago

      Lots of problems with repaying the debt that won’t be apparently for a few years. The lower investment in M&B won’t be seen for a few years.

      Who buys assets in Canada if the seller abroad is going to see their currency devalued at a faster rate than the rest of the world? Lots of problems here people aren’t paying attention to.

  • RW 2 years ago

    Believe what you see, not what they’re saying.

    If inflation was external and demand was low, raising interest rates would be toxic to demand since it would collapse “regular” demand. Why cool regular demand? Exactly, it’s not cooling regular demand — they’re cooling elevated demand.

    • Charles 2 years ago

      People uphold the incoming asset as the chicken laid the gold egg and also think the supply is low demand is high. When the chicken won’t laid anymore gold egg people will surprise the chicken is tooooo much.
      As what I see, all invest property. All morgage fraud and risk everywhere.

  • Hugo 2 years ago

    The Bank of Canada might have been able to pull this ten years ago maybe, but everyone now has a pretty good understanding of how monetary policy works.

    r/WallStreetBets is a generation of kids who realized the system was rigged and took advantage of these policies. Trying to put the cat in the bag by outright telling everyone it isn’t happening won’t go over well with anyone but those who interpret a monetary issues (which is non-partisan) as a partisan issue.

    If the Bank of Canada is “independent,” then this is Tiff’s fault and no one else.

  • Trader Jim 2 years ago

    We all have to admit that this is pretty funny to see a bank say they’re creating too many loans, what are you doing?

    If demand doesn’t exist without ultra low interest rates, does it even really exist? People aren’t standing outside with their $800k deposit, unable to find a home.

  • Omar 2 years ago

    This is a very salient point about investor demand. If low rates are driving demand for investors who will then add a premium to the cost of the housing supply they’ll add to market, isn’t that a credit inefficiency?

    A wealthy person is being given more short-term debt to bid up the price of a home, and then charging a perpetual rent to the person they’re taking it from supported by the low interest rate making it profitable to squeeze the renter on purchase.

    It’s predatory regardless of how this is processed.

  • Oldguy 2 years ago

    I have been following all of this nonsense for years and can now conclude with certainty that the BofC, in conjunction with the government, have decided to support an inflation spiral for the foreseeable future. The consequences are too complicated to get into here, but there will always be winners and losers, and in this case folks on fixed incomes will be decimated. Of course, this will mean that the government will save these people with a few crumbs and they will be forever indebted.
    Or maybe, just maybe, people will wake up and see how they are being managed.
    Bit I doubt it. Sad.

  • Scott 2 years ago

    18-24 months before the effects are felt. There will be an election in 12-18 so the timing’s about right. Hard to believe there’s absolutely no government interference in all of this. Can the BOC be this bad?

  • Tammy Roggie 2 years ago

    As an average Canadian living in a formerly affordable area of Canada (Eastern Ontario), the real estate market and this economy disgusts us. Disgust is not too strong to describe the failure of this country to listen to and respond fairly to its citizens. We live in a city that has a 10 year wait for affordable housing! Perhaps you can try to imagine the conditions families find themselves in. People from the GTA flooded the market here beginning in 2020 and have driven prices beyond what most people in this area can afford. Our property tax rates and rents are on par with the GTA in an area known for high unemployment, a plethora of seasonal jobs, and stunned communities of people who are having to decide if their employment insurance, social assistance, or pitiful wages should pay rent/mortgage and outrageously priced utility bills or feed themselves and their families. Common decency and goodness fled this country a long time ago, not to be found in Parliament or in any of the business sectors, public or private. I believe that these people who make policy decisions and sit in their offices cut off from the reality of daily life for most Canadians should be given a “livable wage” of $2000 a month and then be forced to find safe, healthy places to live and ways to feed their families. What is the solution? There is nothing here that should surprise any Canadian as we look at what’s happening in this country, which is not anything close to the “land of the free”.

  • Faisal 2 years ago

    Hey BoC, There is no supply you can provide to meet the demand when a country converts its real estate into an economy and allows investor whales to jack up prices. On top of it , you have foreign capital floating in which is also going into real estate instead of a proper industry. I am seeing so many houses nobody is living in. Investors are buying and parking them. Most buyers in my city Calgary these days are from outside the city. In a nutshell I do agree with banks on this.

  • lachman 2 years ago

    better late than never,never late is better- Drake

  • JIMMY 2 years ago

    Out-and-out gaslighting from the Bank of Canada they’re just like every government organization now they just get up there and blatantly lie they don’t even care anymore

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