April 21, 2021 | The Flip, Part Deux

Changes in the wind. Pay attention.

The Bank of Canada is pulling back on the throttle. Finally. Weekly bond-buying that stood at an incredible $5 billion every seven days last year and dropped to $4 billion in the autumn is heading down to three. This means the ongoing suppression of interest rates in the bond market (where the central bank now owns 40% of all debt) will lessen. It opens the door for the creeping normalization of rates, as the virus recedes.

There’s more. Did you see the latest inflation stat?

Yeah, I know. The government numbers are ridiculous since we all know life has become hideously more expensive. But this is significant – the cost of living officially doubled from February (1.1% annually) to March (2.2%). So what? Well, 2% inflation is the central bank’s big target. Once we get there, it’ll consider raising its benchmark rate.

Economists and Mr. Market saw that happening in a year. The odds of hikes commencing in 2022 were 60% before Wednesday’s announcement. Now they’re 100%, which poured gas on the dollar. All those folks who come here to tell you the cost of money will never increase and ‘the government won’t let housing decline’ need a new hobby.

There’s more. Vaccines. So far 10.5 million doses have been squirted into shoulders, which means 27% of the adult population has been jabbed. We may still be struggling with the Third Wave, but we know where this is headed, and when. Ten million more doses will arrive next month. About 1% of the population gets inoculated each week, and UK experience shows that at a level somewhere around 40% life gets a lot better.

The central bank is turning off the stimulus tap and telling markets to expect higher rates sooner for one reason: economic recovery. The bankers say growth this year will be 6.5%. Just weeks ago the forecast was 4%. In the world of CBs, that’s elephantine. We’re likely just weeks away (maybe a dozen of them) from everything changing. The next few months will be difficult, volatile, and filled with news of virus victims, new restrictions and a struggling health care system. But it’s finite. The light’s there. End-of-tunnel days lie ahead.

By the way, here’s today’s reaction to yesterday’s blog from the realtor who reported the housing market flipping the day before:

I don’t see an actual rate increase yet, but rates will drift north when the bank gets out of the bond market. I do see the prime rising in 1/4% increments after the election regardless of the outcome. The years run up in real estate prices is attributable almost entirely to  lower rates, so some price decline is inevitable as the rates climb. Judging by your blog there wasn’t a lot of agreement with my comments concerning a cooler market. Maybe a blip, or the very early stages of a correction. Some agents are worried, particularly the 20+ year vets who know that prices don’t rise forever.

It’s a lesson lots of newbie agents, house speckers and inexperienced homeowners have yet to learn. Yesterday we yakked about a potential market flip in real estate. The reasons – prices most people can’t afford and (mostly) a surge in listings. As Covid recedes, expect a dearth in inventory to become a flood. And why not? Astute owners will want to cash in on the highest valuations in history, and the vaccine will make selling a property much less scary. Once prices start to soften, FOMO recedes. Gone is the fear sellers have that they’ll never be able to buy again.

By the way, check out the latest StatsCan borrowing numbers. Maybe things aren’t exactly as they seem. Maybe the ‘bubble market’ is already leaking gas, and the breathless media missed it.

Mortgage borrowing in the latest monthly report fell 12% from January, and has toppled since last autumn – down over 60%. Yes, house sales have been booming (up 40%), but this is evidence a big whack of those resulted from move-up buyers with equity. No surprise there. The kids are being priced out. First-time buyers are the most important fuel of the housing market. When the fuel disappears, the fire fades.

Now, do the Bank of Canada’s moves – cutting back on stimulus and changing its rate-increase timetable – mean the end of the real estate insanity?

Nah, of course not. There’s an ample supply of greater fools left to keep realtors busy. March home prices shot ahead a big 1.5% month/month says Teranet, plumping the most in Halifax, Hamilton and Toronto. Meanwhile CREA reports the average price of a house nationally jumped 31% year/year. It ain’t over yet.

But as supply increases, vaccines flow, the GDP reflates and the end of emergency interest rates grows nearer we’re closer to the end of this bizarre episode than the beginning. Nothing has been normal since February of 2020. Those who think what Covid brought was permanent societal change will learn otherwise. It’s not different this time. It never is.

Garth Turner April 21st, 2021

Posted In: The Greater Fool

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