March 9, 2021 | The Void

Tomorrow the Bank of Canada will do its thing. Expect no rate hike. Not yet. The economy’s still fragile. The vax is just starting to flow. There’ll be an election in a few months. So for a while yet banks will offer 2% fivers

But, says the boss of the nation’s biggest, the CB will inevitably raise its benchmark rate, up to a year or two sooner than expected. Meanwhile rising bond yields have already shoved home loan costs higher by about a fifth of a point and another 10 basis point jump is expected this week. That has CIBC economist Benny Tal warning a “spike” in rates could shock real estate and tip the country back into recession. The trip higher, he hopes, needs to be a smooth one so the housing market can chill in an orderly fashion.

So let’s discuss reality, not hopium.

The OECD says the world economy will charge ahead by about 5.5% starting in the second half of this year (like 90 days from now). The provinces are insisting herd immunity could be here by late summer. Biden promises all Americans who want a shot will have one by the end of May. The American economy is expected to swell by 6.5% in 2021. Bond yields in Canada have tripled since being squished by the bug, because investors know what’s coming. In fact it’s here – inflation. That comes on the heels of historic government spending. As the pandemic ends and people get back to work, a lot will change.

So here’s the dilemma.  The CB faces pressure to jump rates and halt its bond-buying binge, but can’t. Not yet. But if it delays a long time, allowing the economy to run hot for a year, the increases then will be substantial. Like Benny says, a shock.

However, we have a runaway housing market. This time (unlike in 2017) it’s everywhere. Small towns, rural municipalities, hick cities, cottage country, far-flung city-suburbs – prices have inflated because of WFH, aggressive nesting, urban flight and cheap money. The average property price in Mississauga is closing in on $1 million. All 32 major markets in the country are on fire. That makes it way more serious than the GTA-YVR bloat we went through four years ago, when governments reacted with alacrity and alarm.

Conclusion?

The pressure is growing for macroprudential solutions. In other words, government intervention. Like in New Zealand where investors have to put 40% down if they buy an investment property. Even the Re/Max talking-head guy, Chris Alexander, now calls the Toronto situation “an affordability crisis.” Realtors are starting to cringe at current events. “I had an agent with a multiple bid situation the other night who called me saying one was for $200,000 above the ask,” a broker told me. “That’s a real concern since it’s unlikely the appraisal will come in that high. The seller’s all excited, but this is nuts.”

And that was in Halifax, where $200,000 used to buy a nice little pad – not be just the extra sauce on an offer. Like I said, this is everywhere. It’s national. It’s bad social policy. It’s enriching flippers and crushing the newbies. Household debt is inflating right along with property valuations. The transfer of wealth from buyers (mostly young) to sellers (mostly old) is epic. The wealth divide grows daily.

Can it last?

Not a chance. Tal is worried. Scotiabank’s Derek Holt is lobbying for intervention. Re/Max is hitting the alarm. National Bank has evidence stupid house prices are pushing debt limits against the wall – a record number of riskier, high-ratio buyers now have loans equal to 450% or more of their incomes. Outgoing CMHC boss Evan Siddall has warned repeatedly that Canadians are borrowing their way into a crisis. Real estate has been allowed to swell to 17% of the entire economy, making it an engine of growth, but one that now threatens to fly off the tracks and wipe out an entire herd of indebted bovines. Guts everywhere.

Yesterday this blog was savaged for saying, historically, four-fifths of price inflation sticks when a bubble market fizzles. It’s true. Unless there’s intervention. If mortgage insurance rules change, down payments are increased, loan rates allowed to rise, debt ratios tightened, flippers targeted or speculators taxed then sentiment can change fast. So far, crickets.

Will the central bank boss send up a flare when he reports on Wednesday? Will our non-financial finance minister Chrystia address the affordability crisis and debt romp in her first budget (whenever that lands)? And what happened to politicians in Ontario or BC who rushed in to cool smouldering house lust the last time real estate went ape?

We’re witnessing the gamification of homes. Oh, and a void of leadership. At least one of those should be a surprise.

Garth Turner March 9th, 2021

Posted In: The Greater Fool

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