The Growth of Canada’s Money Supply Is Slowing, Here’s What It Means For Real Estate

The Growth of Canada’s Money Supply Is Slowing, Here’s What It Means For Real Estate

Canada’s ever expanding supply of money is finally starting to take a breather. Bank of Canada (BoC) numbers show M1+, a narrow measure of country’s money supply, is slowing in growth. The taper is most likely a sign that higher interest rates are impacting households. The measure is a useful indicator for the sale of assets that need financing, like homes.

What Is The M1+?

The M1+ is a measurement of the most liquid form of money. The BoC counts the currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. Basically, it’s physical currency, and readily available forms of cash. Yeah, it’s kind of an important number. Although it’s rarely discussed outside of the walls of the BoC.

The BoC manages the rate of money growth “indirectly,” this measure being very important. When they raise rates, people and businesses borrow less and begin paying down loans. This results in less “cash” kicking around, which is often reflected as a slower growth of M1+. Slowing growth is almost always a sign of declining economic growth. The impact will be more clear to industries that need financing of large price tags, like cars and houses.

The Growth Rate of M1+ Is Decelerating… Fast

The growth rate of M1+ has been falling below the median rate of growth. The year-over-year rate of growth for March 2018, fell to 6.7%. This is the slowest pace of growth for a March since 2003, when it was just 3.6%. The trend has been below the median rate since November 2017. Prior to this period, we haven’t seen M1+ growth fall below this level since 2015.

Canadian M1+

Percent change in M1+, showing declining economic activity.

Source: Bank of Canada, Better Dwelling.

That was a little more high level than normal, what’s the takeaway? If you had doubts that higher interest rates are doing their job, this shows you they are. Higher rates need more cash to service debt levels, and that’s being shown in the taper of M1+ growth. It’s also becoming more expensive for debt holders to hold cash, leading borrowers to pay it down.

All of this sounds great if curbing debt is the goal, but it is indicative of much more. The BoC notes the slowing of M1+ is often a sign that the general economy is slowing. After all, less cash on hand is less money that you can spend on consumer goods. Slowing economic growth tends to compress real estate markets even further. That makes the fall recovery agents are touting on your favorite three letter news networks, a little more unrealistic.

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  • MKMO 6 years ago

    Anyone that thought we can continue down this path forever is a fool. Eventually, we run out of money to borrow, or we send the dollar lower. We’ve been doing the latter for 5 years.

    • Trader Jim 6 years ago

      Wish this was adjusted for the inflation adjusted M1+, but still interesting. Subtract 2%, and that’s about where we are. Kind of disturbing when you realize this is the rate everyone’s cash savings are growing.

      These interest rates plummeting really made sure no one had cash in their accounts, which is how every real estate crash occurs. No rainy day cash, because it’s all in the assets you forced people to buy. People can only re-fi their homes so many times.

    • Dennis 6 years ago

      The Quantitative Tightening in America is taking vast amount of money out of the system.
      Money is no longer cheap and free flowing which is terrible for real estate.
      Toronto (GTA) sales are stuck at 7000-8000 in the spring market, this is terrible when for 2017, 2016 it was 11,000 -12,000.
      In dollar terms YTD aggregate sales GTA – 2016: $24.16 Billion 2017: $32.72 Billion
      2018:18.83 Billion.

      If we look at Real estates agents they have lost $556 billion in sales commission in the first 4 months.

      • Dennis 6 years ago

        556 million not billion in commission lost.
        using 4% commission rate.

      • TonyR 6 years ago

        Good! F*#k real estate agents. Useless bunch of weasels.

  • Ian 6 years ago

    lol. Ramp Capital’s game is very apparent after 2006. Note the massive accumulation during the Great Recession, right before banks needed a bail out? Then it barely goes below 6%, with two exceptions since the Great Recession. That’s how you know those inflation numbers are garbage.

  • Sammy 6 years ago

    Isn’t growth still growth? 6.7% sounds pretty good to me. That means its still doubling every 11 years.

    • PLC 6 years ago

      Not really, broken trend line, capped growth.

      • Trader Jim 6 years ago

        lol. Yes, the mini recession that resulted in interest rates being slashed, then was wiped due to an adjustment? Oops, guess we didn’t need to slash rates an capitulate markets higher.

        *fog horn*

  • @xelan_gta 6 years ago

    Excellent article. While it’s probably too early to say and the graph visually doesn’t really ring any bells yet the foundation of the article is super important.

    Like I posted yesterday the key to understand Canadian RE market in general is to watch pool of money all Canadians are able to spend on RE and money supply and credit growth are directly related to that.

    Prices will not react right away to that but they will eventually because if you don’t have enough purchasing power among all buyers to sustain current prices for all properties combined those prices must go down unless massive capital inflow from abroad compensate for that (which is unlikely now).

  • @xelan_gta 6 years ago

    Also I want to share with you guys a graph I created which tracks overvaluation for the whole GTA.
    Average yearly sell price for all GTA properties combined used (it may not be clear from the description)

    For those who only trust industry made graphs please search for:
    “National bank housing affordability monitor 2018 pdf” – first link.

    The biggest difference is that National bank is using median prices while I’m using average prices (I don’t have the necessary stats for median prices). Otherwise it’s the same idea build behind those two graphs.

    So CMHC already told us that properties are overvalued in Toronto. Now you know approximately by how much.

    • John 6 years ago

      Thanks for sharing Xelan_gta.

      Read a couple of your Twitter posts too. While we have disagreed on some BD points, it is interesting how one-sided Scott Ingrams disagreement is.

      • @xelan_gta 6 years ago

        You’re welcome John. Scott is one of not so many Real Estate Agents I respect and it’s OK if we see things differently sometimes.

    • Tommy 6 years ago

      Amazing how closely it mirrors the valuation of the 1990 crash. We literally just passed it this year and it seems we’re losing steam at a similar threshold. As much as things change, they stay the same….

      • @xelan_gta 6 years ago

        And at the very same time we have:
        “Condo apartment construction reached a record 61,337 units as of the end of Q1-2018”
        “With unsold inventory at a 16-year low of less than 8,000 units, asking prices for remaining units grew 29% year-over-year to $914 psf”

        Record overvaluation, record construction, record condo price growth.
        What could go wrong in a raising interest rates environment?

    • 905 Agent 6 years ago

      Nice chart. Unfortunately, not even agents have access to numbers before 1990, otherwise I would happily grab those numbers for you.

  • @xelan_gta 6 years ago

    Grizz, I promised you to share insights on USD/Gold investment options.
    An interview just came up with David Wolf who is betting on USD. Sounds solid to me.

    Overall I would recommend to watch it for everyone because it covers Canadian RE and Stock market as well.
    Grizz. if you follow me, ping me a message so I can send you more info regarding this topic directly going forward.

    • Grizzly Gus 6 years ago

      Thanks Xelan. Yeah similar to what Im thinking. CAD is going to take a dip. No twitter for me.

    • John 6 years ago

      I can’t seem to watch the video of David Wolf, but I checked his holdings at mutual fund holdings at Fidelity, and they are almost all primarily Canadian stocks and bonds.

      I think he has an ulterior motive to keeping interest rates low, so I dont hold much stock in his suggestion.

      He used to work for BoC. Now her world for MER.

      • @xelan_gta 6 years ago

        He may have an agenda, but whatever he is saying in that video sounds reasonable to me. If you have links to different analysis regarding USD/CAD future I’ll be happy to check those out.
        I know that forex is even harder to predict than stock market.

  • AJ 6 years ago

    If my memory serves me right, we had a mini recession in 2015 ( two quarters of negative GDP growth). This graph shows that the M1 supply growth was decelerating at that time. Guesswhat we did: Because of the oil price crash and the associated impact on Alberta’s economy we slashed interest rates by another 50 bps. This took the craziness to another level and every TD&H went looking for a house and blew up the bubble into the monstrosity of today.
    Let’s see what happens now!! No easy way out!!!!

    • vnm 6 years ago

      Wolf echoes the sentiment that caused the worldwide asset bubbles: interest rates “can’t” go up, currently due to a fragile, debt-laden economy propped up by RE and consumer spending.
      Or what, we have a recession?

    • 905 Agent 6 years ago

      That recession is also wiped out of the books through the adjustment. Now we have stimulus as a result of a miscalculation. whoopsie!

  • Chester aka Ketchup Chips 6 years ago

    all you idiots praying for an RE crash make me sick. I had to go back to the streets and turn tricks this weekend just to make my mortgage payments. meanwhile my scumbag tenants are getting subsidized by thousands per month and protected by the commie government with rent control. None of you losers know what it takes to own properties or be a landlord. Owners rule, renters drool. You know I’ll come out on top eventually. I’ll work as a male prostitute for as long as I have to to make bank, but i’ll make it and you losers will still be renting.

    • Grizzly Gus 6 years ago

      Well hey, at least you have figured out a cash flow positive business model! That’s step one to not going bust

    • carlton 6 years ago

      Hang in there Chester, you’ll have company soon enough and I don’t mean from your clientele.

  • Justin Thyme 6 years ago

    In today’s economy, with the proliferation of credit cards, does M1+ really have any relevance anymore? Liquid money is SO last century.

    • Alistair McLaughlin 6 years ago

      If I buy something with my credit card, that dollar amount ends up as a deposit in the retailer’s merchant account. In other words, part of M1. So it still matters.

    • @xelan_gta 6 years ago

      Justin, you are probably mixing up M1+ with M0.
      M0 is a paper money while M1+ additionally includes deposits and loans (including credit cards, mortgages etc).

  • Cat 6 years ago

    Xelan GTA

    Your remarks are very confusing and contradictory to one another,your talking from both sides of your mouth.make your mind up.

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