Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
The BoC Governor Macklem appeared before Parliament’s finance committee a few days ago. The head of the central bank explained quantitative ease (QE) doesn’t impact home prices. We have a problem with that statement, since even the BoC doesn’t believe that. We walk readers through BoC research showing the Governor knowingly misled lawmakers.
Canada’s oldest bank made the unusual move of saying the BoC was misleading. Referring to the Governor’s committee appearance, BMO disagreed with his statements on housing. They didn’t just disagree though. They also explained the BoC’s policies helped drive home prices to a bubble. One presented research to back their statement, the other spoke off the top of their head. Can you guess which one was which?
Canada’s central bank has just released a study on what to do when pressured by the Government. The loss of monetary dominance has resulted in central banks abandoning price control. As a result, they now are exclusively supporting Government spending. They suggest in the future a framework be implemented that provides conditional support. This is the only way for both parties to maintain credibility.
Canada’s job market is equally robust to pre-2020 days, with unemployment plummeting. In February, the economy added 337,000 (+1.8%) jobs, pushing the unemployment rate to 5.5% — the lowest rate since May 2019. Back then, inflation was at less than half the current rate and interest rates were much higher. Having such a robust economy will further support higher interest rates.
The household savings rate is finally beginning to taper towards typical levels. Households saved 6.4% of disposable income in Q4 2021, down from 11.4% last year. At last quarter’s level, the amount is still elevated compared to the ~2% usually seen. It’s nice to see people save, but adjustments like this tend to be bad for the economy. After all, the additional savings used to be income for a business, now making less money.
Canada’s bank regulator has Combined Mortgage-HELOC Loan Plans (CLPs) in their crosshairs. The former speciality product has seen a recent explosion in use, rising 25% over the past two years. These products allow households to withdraw part of a payment as soon as it’s made. The bank regulator is concerned people are using CLPs to support higher home prices. These borrowers aren’t seeing their debt shrink either, increasing their vulnerability even further.
Major Canadian real estate markets are seeing inventory levels improve. After an unprecedented tight market, RBC has observed the inventory shortage eased. Major markets are now approaching balanced markets, which should cool price growth. Though current buyers think it’s tighter than ever.
Almost everywhere is being hit by high gas prices, and it’s about to get a lot worse. BMO estimates gas prices had yet to price-in the rise in oil prices before the Ukraine invasion. Before the conflict began, gas prices were set to rise enough to consume an extra 1% of household income. Since then, prices have climbed even higher than BMO’s estimate. All of this extra money is being diverted from spending in other areas of the economy, and it’s an issue.
The Canadian economy took a break from concentrating on real estate, but it’s back to what it knows best. Residential investment climbed to 9.6% of GDP in Q4 2021, up from 9.3% in the previous quarter. When real estate is producing so much wealth, it’s hard to see why anyone invests in any other area of the economy. It might work in the short-term, but it threatens the long-term viability of the economy.
Canada’s national statistics agency found COVID-19 mortality was higher for those in apartments. Stat Can’s latest study shows an increase in mortality rate for those in high-rise buildings. They attribute this to common areas and shared facilities. Unfortunately, they didn’t separate the data by region or occupation. This makes it hard to isolate if the building is the problem, or if people with high public contact jobs live in apartment buildings.