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September 22, 2020 | Chill

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Lately I’ve been stuck in Lunenburg, on the south shore of Nova Scotia because leaving here (even for my pad in the Big Smoke) means a 14-day quarantine upon return. It’s called the Atlantic Bubble. Anyway, here are three observations.

First, the annual hurricane arrived today. Teddy. Nature is still in charge, apparently. It’s exhilarating.

Second, no virus here. Virtually nobody in the province (or the one next door) has it.  No hospitalizations. Been that way for a while now. No wonder there’s a bubble.

Third, real estate is as stupid in a town of 2,200 souls on the edge of the sea as it is in Leaside or Kits. Used to be that a $500,000 listing was top-end and took a year to sell. Now such a property goes in a couple of days, and prices have risen a third in eight months. But the really interesting point is none of the new buyers are local. And few of them have set foot in the properties (quarantine, remember?). The Upper Canadian refugees are clearly on their way, thanks to FaceTime.

As this pathetic blog recently pointed out, the Covid Boom’s everywhere. Virtually all major regions in North America have seen people panic-buying houses they think will protect them in areas they feel are safe. Condos bad, detached good. Downtowns germy, suburbia clean. This has led to a price hike nationally of 18% year/year, and a new explosion in housing debt. Despite a recession, joblessness and massive uncertainty, families have been taking the plunge. It’s weird. Emotional. Probably dangerous.

CHMC still thinks so. The federal housing agency said it again this week. “When I look at the housing market there are a tremendous number of risks,” warns chief economist Bob Dugan. “I’m not convinced that we have a sustainable basis for housing demand in the economic disturbance that’s going on related to COVID-19. That’s why I say I stand by the forecasts.”

The forecast is for a drop in real estate values of between 9% and 18% within the next few months. Of course, as prices snake higher that becomes way less scary for people. Besides, nobody’s paying attention. The virus in general has created far more demand for real estate than there is supply. In places like Toronto these days the inventory of resale homes has dropped from months to days.

The rocket fuel behind all of this is the cost of money. And behind that is the central bank.

The Bank of Canada is acting in an extraordinary fashion to artificially depress interest rates in order to (a) encourage borrowing and economic activity and (b) allow the federal government access to oodles of cheap cash to finance an historic spending binge. The results are predictable. Savers are being crushed. Borrowers are snorfling almost-free loans. And asset values are rising as the multiple bids come rushing in.

Look at the chart below. Our central bank now owns a third of the entire Government of Canada bond and T-bill market, which is double the amount of national debt that the US Fed has purchased. This bond-buying orgy has pushed yields lower, resulting in 1.5% mortgages. It means, in effect, folks can finance houses which are appreciating at nine times the rate of inflation with 20 times leverage using loans that get easier to pay as the economy reopens. The last time we saw similar conditions?

Right. Never.


Source: Bloomberg, RateSpy, Turner Investments. Scale is in billions of dollars.

The burning question is how long this will last. Rising home values mean buyers carry a lot more debt, which low rates make possible. But the virus, double-digit unemployment, recession, deflation and economic mayhem will not last forever. Vaccines and therapies will come. Social distancing will end. Elevators will no longer be toxic petri dishes. People will have showers, put their pants on and go back to work.

As the economy revives, so will inflation. In fact it might roar as companies increase costs to survive and workers try to catch-up on lost incomes. With inflation and GDP growth will come higher rates. Central banks will turn from buyers of bonds to sellers, since they never intended to hold so much sovereign debt. The rate manipulation will stop when the economy no longer needs the crack cocaine of cheap money. This is not conjecture. It’s monetary fact.


Three years maybe. At most. It means people taking five-year terms now will not be renewing at the same level. Not even close.

So CMHC may be eventually right. Some people will regret their hasty emotionalism in the midst of a pandemic fog.

Others, though, will live quaintly in paradise. Down the street from me.

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September 22nd, 2020

Posted In: The Greater Fool

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