Godspeed

The reflation trade is back on, and Canadians are jumping back into their asset of choice, real estate. Canadian home sales bounced 11.5% year-over-year in January, marking the best sales figures for the month in 12 years. Meanwhile, the number of newly listed homes was little changed in January, edging up a slight 0.2% on the heels of a series of declines which has left new listings at a near decade low. There was just 4.2 months of inventory for sale, the lowest level since the Summer of 2007. As a result, national home prices continued to push higher, with the home price index accelerating 4.8% from last year. Home prices have now increased for eight consecutive months, and while it is true all markets are local, the home price index moved higher in 14 of the 18 markets tracked by the index.

With mortgage borrowing resuming, and home prices back on the climb, this will certainly keep policy makers awake at night, and perhaps pour a bucket of cold water on recent discussions to ease the mortgage stress test. Imagine the conversations at the Bank of Canada today. We are sitting on the highest interest rate policy in the developed world, with an obvious bias towards cutting rates. However, household debt and home prices continue to rise despite policy measures aimed at cooling the consumer debt binge. Meanwhile, despite a real negative interest rate policy, consumer insolvencies jumped a rather alarming 9.5% in 2019, the largest annual increase since 2008-09 during the great recession. This is despite extremely loose financial conditions and an economy enjoying full employment. In addition to that, the household debt service ratio hit a record high of 15% in Q3 2019. The last time household debt servicing costs were this high was in the second half of 2007 when the Bank of Canada’s overnight rate hit 4.50%. Now throw in a black swan event such as the Coronavirus and the situation gets even more complicated. Tough times for those at the helm, godspeed. This post is via the Monday Morning weekly Newsletter. You can join for free here.