October 11, 2021 | Taper Time

The Canadian economy added 157,000 jobs in September, finally recouping all of the jobs lost during the height of the pandemic. However, wage inflation remains tepid, growing just 1.7% from last year, despite overall CPI inflation running at 4.1%, an eighteen year high. In other words, wage inflation is not keeping pace with the rising cost of living.

The Bank of Canada’s Tiff Macklem took to the airwaves this past week, assuring Canadians inflation was likely to prove transitory. Macklem said supply disruptions and price pressures are “proving more complicated, they are continuing, so there is some risk that there’s a bit more persistence than we previously thought.” However, he added there are still “good reasons” to believe high inflation will be temporary.

Let’s hope he’s right.

Part of the Banks thesis for transitory inflation is a slowing housing market. However, i’m not sure what data Macklem and Co are looking at. September housing activity points towards a housing market that remains piping hot.

Seasonally adjusted home sales in Toronto were up 0.7% in September, the first month over month increase since March. Meanwhile, active listings for sale plunged by nearly 50% from last years levels. There’s a paltry one month of inventory for sale in the Toronto area, meaning prices are pushing higher once again. The home price index inflated by 2.2% from August, a huge move.

Vancouver home sales fell 14% off last years record highs. However, condo sales ripped to record highs in September, suggesting they might be the source of growth in the year ahead. The detached housing market is suffering from the lowest levels of active inventory for sale in 20 years. Prices across the broader market are still increasing, with the home price index up 0.8% from August. Bidding wars remain a common theme.

Suffice to say, financial conditions remain very favourable, adding to the housing bull market. The Bank of Canada is expected to taper its purchases of government bonds later this month, as it tries to exit emergency liquidity measures. Just how far they’ll get remains a mystery. Overnight markets are now pricing the Bank to hike interest rates almost 3 times by the end of 2022. That’s likely to prove difficult even with inflation running hot as Canada’s total credit to the non-financial sector sits at 359% of GDP.

Happy Thanksgiving.

Three Things I’m Watching:

1. Canada’s labour market is recovering, but still below pre-pandemic trend levels. (Source: Bloomberg)

2. Canadian real interest rates are at 50 year lows. This explains all you need to know about the strength in housing. (Source: Richard Dias)

3. Year to date home sales in Greater Vancouver at record highs through 2021. (Source: Saretsky Report)

Steve Saretsky October 11th, 2021

Posted In: Steve Saretsky Blog

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