Is Canadian real estate a bubble, and is the Fourth Industrial Revolution setting us up for even further inequality? These are just a sample of insights former Bank of Canada (BoC) Governor Stephen Poloz shared with us in our interview last week. For those that don’t have time to watch the whole thing (you probably should), here are the five most important insights for Canada’s economy.
A House Is Like A Bond, As Rates Go Up Prices Go Down
Home prices are like bonds, and respond to interest rates the same way other asset markets do. Higher rates mean home prices are likely to adjust lower, and that’s expect. It’s the same mechanics, lower rates and higher prices, we just witnessed, but in reverse.
“Everybody had to know that a house is just like a bond. The house delivers rental payments to you. If you own it, you don’t have to pay the rent. Therefore it’s delivering that every month… and when the interest rate goes from zero or really close to zero, to a more normal number, that price has to revalue. That’s the same thing that happens in stock markets, and in bond markets. A house acts the same way.”— Stephen Poloz
Loose Fiscal Policy Will Drive Rates Higher
Canada’s government, at various levels, can help tame inflation by adopting tighter fiscal policies. He doesn’t think this will cause a recession, but not adding new spending can prevent the need for even higher interest rates.
“We could make a less risky path here, if fiscal policy were able to be tighter… you don’t have to put the economy into recession, you just have to snug it. And for sure, you’d use this time not to do something extra. You know? To stimulate the economy and work at cross purposes with monetary policy, because that’s just a recipe for rates having to go even higher. Having more of the risks we’re talking about show up.”— Stephen Poloz
The interview was conducted a week ago, and since then the Federal Government has announced additional spending. In addition, today’s already-rock-bottom unemployment numbers came in even lower, indicating the economy is still running hot. A hot economy means even more inflation, and thus higher rates.
It appears Poloz made the right call. This morning, mortgage expert Rob McLister shared that the overheating economy pushed the forecast for Canada’s terminal lending rate to a whopping 6.7%. Nice call, Poloz.
Canadian Real Estate Has “Bubble Features”
Canada’s real estate market has froth and “bubble features”, but it’s ultimately supported by strong fundamentals. It’s unclear what it means for prices in the short-or medium-term, but it does indicate a downturn is unlikely to be catastrophic, or lead to stranded assets.
“Whether it’s a bubble? I don’t know, fundamentals are super strong. It’s hard to distinguish between a market that’s adjusting to its fundamentals, and one that’s in a bubble. Probably we had some bubble features, I would say. But not that big of a bubble. Fundamentals are super strong.”— Stephen Poloz
Expect A Recession, But It Won’t Be A Long One
If there’s a recession, Poloz doesn’t see it being deep or long. He sees this as a correction of excess, and fundamentals will cause the economy to bounce back fairly fast.
“We’re still in a good place. You know, unemployment’s super low. There’s lots of good jobs available. There’s jobs empty, etc.. So we just need an altitude correction. It shouldn’t be very painful. So if the plane levels off, that’s okay. If it has to go below 35,000 for a little bit, then come up to 35… That’s a recession probably, but it wouldn’t be a big one. So it wouldn’t be a long one.
“And so I don’t think we’re in for a nasty period.”— Stephen Poloz
The Fourth Industrial Revolution Will Cause Further Inequality
… It’s not all good news though. The Fourth Industrial Revolution is here, and that will cause a global shift in the world that is likely to be “disinflationary.” Also the topic of his new book, he dives into the five tectonic shifts that will shape the future economy: demographics, technology, income inequality, debt, and climate change.
The former central banker explains about 15% of the world’s workforce will be disrupted, and that will cause rising inequality and political division. This is typical of industrial revolutions, and we’re likely to see it occur during this transition as well.