Why Governments, Bonds and Housing Matters in 2025

Watch the full Episode here ▶️ on YouTube

Hi — Steve Saretsky here. If you watched my latest Loonie Hour episode, you’ve heard the conversation: the policy dial is shifting, and it’s not subtle. In this article I’m going to unpack what we talked about — the housing signals out of Vancouver (and by extension Toronto), the role investors played in Canada’s housing boom, the case for why governments appear to be leaning into a “fiscal bazooka,” how markets are pricing future rate cuts, and why the bond market — not the stock market — is the flashpoint to watch.

How we got here: the macro backdrop in plain English

Over the last 15 years policy and price have conspired to reshape how Western economies function. Low and negative real interest rates created strong incentives to borrow, speculate and redirect capital into illiquid assets such as real estate. Governments leaned on immigration as a growth lever; central banks kept money cheap; and investors — institutional and private — chased yield in real estate and other long-term assets.

That produced two broad outcomes: a long secular increase in asset prices (housing foremost among them) and a rising sensitivity of public finances to interest rates. When rates were effectively zero, many structural problems were hidden: deficits could balloon without immediate pain and ambitious policy choices — renewable rollouts, subsidies, large social programs — felt manageable. Now, with rates higher and inflation still stickier than some hoped, the seams are showing.

Negative real rates and the house of cards

Here’s a simple framework I like to use: when nominal interest rates are lower than inflation, you’re in negative real rate territory — effectively you get paid to borrow when measured in real purchasing power. That creates obvious incentives. Borrow, invest in assets that appreciate faster than inflation, and ride the tide. The long-term consequence is the buildup of leverage and malinvestment, often in housing.

Take Canada: a generation of buyers and investors learned that real estate appreciated almost every year. Governments frequently stepped in to prop markets when they wobble. The result was a steady stream of capital into new condo developments, some of which were bought not by eventual occupants but by investors speculating on future price appreciation. That created a supply of investment-style housing that suddenly looks less attractive when interest rates jump from near-zero to 4–5%.

Real estate signals: Vancouver and Toronto tell the same story

June housing data from Vancouver — which tends to track Toronto closely — showed a clear bifurcation in the market:

• Home sales were the slowest for a June in about 20 years (outside of 2019).
• New listings for condos were at all-time highs, while single-family new listings remained below the 20-year average.

What does that mean? The pain is concentrated in the condo segment. A long bull market attracted speculative capital and encouraged developers to build more condos. When rates move from zero to 5%, many of those investors decide they don’t want to hold the paper any more — they list. That floods supply for condos and knocks the wind out of that market faster than the single-family market, where inventory is still limited.

Why are condos more vulnerable? For one, price transparency and investor behavior: condos are easy to buy in pre-sale (a riskier proposition for end-users who prefer to walk through a finished unit). The pre-sell model used by Canadian banks requires developers to secure a high percentage of sales before construction financing is approved, which naturally funnels institutional and investor capital into new condo projects. Those investors are the liquidity providers. Without them, much new condo construction would simply stop.

Do institutional investors make housing unaffordable?

There’s a persistent narrative that “big bad investors” are to blame for unaffordability. My take: they’re a symptom and a partial driver — but not the root cause. The real drivers are the policy environment and the structural incentives that preceded investor behavior:

• Two decades of chronically low real rates that rewarded leverage.
• Pre-sale financing rules that require developers to lock in buyers early, which preferentially attracts investor capital rather than end-users.
• Rapid population growth driven heavily by immigration without an equally rapid capacity to deliver housing stock.

In short, investors respond to incentives. If every year your house appreciates and the state signals it will step in to stabilize markets, investors will chase returns. That behavior feeds back into higher prices — but blame alone masks the bigger picture of macro policy and capital structure.

 

The Fiscal Bazooka: what Washington is signaling

One of the defining themes we discussed in the Loonie Hour: the U.S. administration is explicitly saying it will “grow” its way out of debt. Politically, the rhetoric is clear — spend to stimulate, deregulate, attract foreign investment, especially in energy and technology, and run the economy hot. Treasury Secretary Scott Bent (Pent in the episode) summed that idea up bluntly:

“We are going to grow the GDP faster than the debt growth, and that will stabilize the debt to GDP, which is the most important number. We’re getting spending under control. Then through POTUS’ trade policies, tax policies, deregulation policies, we’re going to grow faster. We’re going to grow the GDP and shrink the growth of the debt. And that completely changes the trajectory.”

That framework has two immediate policy levers: fiscal stimulus (spend) and monetary policy (cut rates). If the Fed cooperates with rate cuts, the interest burden on existing government debt falls, which is an easy way to smooth fiscal math. Consider this simplified example: if a huge portion of outstanding Treasuries rolls over at a 4% rate, cutting those rates to 2% materially reduces government interest expense — freeing up hundreds of billions on a national scale.

Markets have noticed. Futures markets and fed funds futures are pricing in a series of cuts over the next 12 months. As of the episode, about 100–150 basis points of cuts were being priced in, with many of those cuts expected in the next 6–12 months. That optimism is itself a driver of asset price appreciation: cheaper rates make equities, real estate and commodities more attractive.

 

But the math isn’t that simple

There are two catches:

1. History shows that even a decade of ultra-low rates didn’t guarantee that growth would outpace debt accumulation. Structural productivity improvements are needed, and those don’t appear overnight.
2. If all major governments embark on large unfunded deficits while simultaneously seeking lower rates, the bond markets may balk. If bond investors demand higher yields to compensate for perceived fiscal risk, the central banks will be forced into uncomfortable decisions.

That tension is the heart of the next risk: market pricing assumes cuts. But if economic data surprises to the upside (strong jobs, durable consumer spending), the Fed will be less willing to cut. Conversely, if cuts do happen and deficits balloon, inflation could reaccelerate — again pushing bond yields higher. It’s a feedback loop with multiple fragile balances.

What breaks first? Why the bond market matters — and can cause panic

I’ll say it plainly: the next serious market crisis is likeliest to start in bonds and credit, not the equity market. Bonds are the plumbing of the financial system. They’re huge, highly leveraged, and sensitive to small changes in interest rate expectations.

Think of it this way: equities are loud and obvious, but bond markets are where the real solvency and cash-flow mismatches show up. If governments start issuing massive amounts of debt while simultaneously signaling they want lower rates, someone has to buy that paper. Historically the private sector — pension funds, banks, insurance companies — has absorbed a lot of issuance. But when issuance grows massively faster than demand, options appear:

• Higher yields (buyers demand more return) — which raises interest costs and can blow up budgets.
• Central bank intervention (monetary financing / large-scale bond purchases) — which can be inflationary over time and blur fiscal/monetary boundaries.
• Regulatory mandates forcing domestic institutions to purchase government debt (financial repression) — a political solution that redistributes returns but masks underlying market signals.

Any of the above introduces market distortions. And when market participants realize a central bank or government will protect bond markets at near any cost, moral hazard increases. That can produce the very inflationary outcomes policymakers hoped to avoid.

 

International vignettes: the UK and Germany offer cautionary tales

We don’t need to rely on abstraction — recent events across Europe show the fragility of sovereign bond markets when fiscal policy becomes politically contested.

The UK: a reminder that bond markets bite

The recent U.K. episode is instructive. The government’s fiscal plans hit political resistance at home, the proposed adjustments were poorly received by markets, and the British gilts (government bonds) sold off aggressively. The finance minister — Rachel Reeves — endured a brutal media and market moment. The sell-off was a reminder that bond markets will express concern quickly when policy risks rise and credibility falters.

Why the UK matters to us: it’s an example of how a misstep in fiscal communication or a weak political consensus can trigger a rapid repricing in yields, currency moves, and broader market volatility. These moves ripple globally, not just domestically.

Germany: ideology meets reality

Germany’s experience is another critical datapoint. A country that leaned hard into renewables and phase-outs of nuclear and fossil fuels found itself vulnerable when geopolitical stressors (e.g., Nord Stream outages) pushed energy costs sky high. The political pressure of job losses, industrial stress and rising energy bills forced a pragmatic pivot: reopening discussions around natural gas, drilling and energy security.

This matters for two reasons:

1. It shows the limits of policy choices made under the assumption of calm and cheap financing. When the world changes, political reality catches up and policy reversals can be abrupt.
2. Energy and industrial competitiveness feed into macro outcomes: when energy becomes more expensive, inflation and production costs rise, which undermines the fiscal math.

Put simply: ideology can be re-priced quickly when voters and employers feel the pain of policy choices.

Canada: where we sit in the global drama

Canada shares a lot of the same structural issues: high housing costs in major cities, a heavy reliance on immigration for population growth, a long period of cheap money, and now an administration that’s reassessing taxes and energy stance. We touched on a few specific policy shifts:

• The proposed digital services tax was rescinded — a move that avoids a revenue grab that would have been passed through to consumers by large platforms and risked retaliation.
• Discussions around carbon policy, capital gains and the trajectory of federal spending remain politically live themes.

 

I gave Mark Carney credit in the episode where it was due: walking back the digital services tax (which was unlikely to raise meaningful revenue relative to total federal receipts and could have provoked trade friction) was prudent. That tax was more symbolic than fiscal; it risked being paid by Canadian users in the form of higher prices on highly inelastic services.

But Canada’s fiscal path isn’t risk-free. If the federal government decides, in the name of growth, to run large deficits while expecting lower rates to persist, we face the same three-way tension I outlined above: fiscal expansion, monetary policy easing, and bond market appetite. If demand to buy debt falters, options include mandated purchases by domestic institutions or larger-scale central bank purchases — both forms of financial repression with long-term consequences.

US jobs data and the near-term rate outlook

One practical datapoint we discussed on the show was the US jobs report. The headline nonfarm payrolls came in stronger than many expected — roughly 147,000 new jobs — and the unemployment rate ticked down to around 4.1%. Some of the additions were government jobs (notably state and local), while construction employment gave a welcome boost after a slump.

 

What does that mean? A stronger labor market gives the Fed more reason to stay cautious on cuts. At the same time, market pricing — based on futures — was expecting roughly 100–120 basis points of cuts within the next year, front-loaded to months like September. That disconnect between market pricing and fresh macro strength explains why markets are jittery: if the data remains firm, cuts may be delayed or smaller than priced. If the data weakens, cuts could be larger and faster — and that again would influence bond markets, currencies and commodity prices.

What investors should think about — practical takeaways

If you’re an investor or someone with savings and a mortgage, here’s the cliff-notes version of what I think matters and what actions are worth considering. This is not advice — it’s a synthesis from the show and my own views.

1) Bonds and duration matter

The fragility I described is real. If yields spike, long-duration assets (30-year bonds, long-duration credit) will suffer most. Review your fixed-income duration exposure and consider whether you can tolerate sudden repricing. Hedging and laddering can help.

2) Real assets are nuanced

Real estate remains local. Condos in major urban centers with heavy investor concentration are priced differently than single-family homes with tight supply. If you own investment real estate, understand your yield, carrying cost and replacement risk in a rising-rate or high-inventory environment.

3) Expect policy volatility

Governments are likely to continue experimentations: fiscal stimulus paired with calls for rate cuts, mandates for domestic buyers of government debt, and ad hoc policy reversals (energy, taxes) in response to voters. That creates episodic volatility markets respond sharply to new policy signals.

4) Commodities and energy exposure

If governments push fiscal stimulus and growth, commodity demand rises. Supply for many commodities is relatively inelastic in the short term, so price shocks are possible. Energy policy U-turns (Germany) and new LNG shipments (Canada’s West Coast) are examples of the world adjusting to supply/security priorities.

5) Keep liquidity handy

Periods where bond markets reprice quickly are not great for forced buyers. Keeping some liquidity allows you to take advantage of dislocations or simply avoid being forced sellers.

 

Opportunities and sponsors

On the show I mentioned Neighborhood Holdings as an alternative way to access Canadian real estate exposure through a mortgage product portfolio. For investors uncomfortable with public market volatility but looking for Canadian real estate yield, mortgage-focused strategies can be an option — but they come with their own risks and require due diligence.

Also, a practical plug: if you want to manage household risk, I tried Square One for home insurance and thought their customizable policies were worth a look. For people re-thinking overall exposure in a volatile macro environment, simple household cost savings can improve flexibility.

Final thoughts — the path forward is not linear

We’re at a point where political choices and economic realities are converging. Policymakers appear to prefer stimulus and easier financing to solve fiscal challenges. Markets are currently pricing in that preference. That can be bullish for risky assets in the near term — equities, commodities and certain credit sectors — if growth follows through and inflation remains contained.

But the scenario contains a structural contradiction: if the bond market loses confidence, yields will rise and the whole plan becomes more costly. That’s when we see central banks step in, regulators mandate institutional purchases, or governments engineer financial repression. Any of those outcomes changes the investment landscape substantially.

As investors, the best posture is disciplined: understand exposures, maintain liquidity, think about duration across portfolios, and pay close attention to policy signals — fiscal announcements, central bank messaging, and who’s buying sovereign supply. The next crisis is unlikely to be a sudden crash in equities; instead, it’s likeliest to begin in the plumbing of credit and bonds. That’s where risk management will matter most.

Thanks for reading. If you want the conversation in audio or video form, the episode covers all these points in more informal chat — and of course I encourage you to keep asking hard questions. The next few months will be telling.

— Steve Saretsky