The secret sauce

If you think nothing surpasses the 28% bloat in the price of an urban house over the past year, well, think again.

Government crushed it. Public spending went up 30.7% at the same time revenues fell 2%. (Imagine if you ran your family or business like that.) A deficit of $40 billion in 2019 turned into $325 billion hole last year. Here’s the thing to remember: as a share of the economy this deficit jumped by a factor of 14. In one year.

Yeah, yeah, there was a virus. Cost a ton. So what?

Well, here’s where real estate and spendy federal politicians collide. Both are heading for a reckoning.

Last year, while the feds were shoveling borrowed money out the door with debt hitting the highest level ever relative to the economy (and each Canadian in hock for $74,747) the cost of borrowing went down. Here’s how Stats Can explained it in a report yesterday:

This phenomenon is mostly explained by monetary policy during the pandemic aimed at increasing money supply, encouraging lending and investment (quantitative easing) and keeping short-term interest rates close to zero. This policy had the effect of lowering interest rates on long-term debt. This has enabled governments to finance the unprecedented deficits generated during the pandemic at low cost and to refinance maturing debt at lower rates.

This is the secret sauce of Justinomics. You can leverage your tail off and jack spending because it’s so cheap to borrow. Nobody’ll notice! And it’s cheap because there’s a virus. Go, Chrystia, go.

But wait. What happens when the virus ends?

Bingo. Now everything changes. As Mr, Bond Market factors in inflation and investors demand a premium for holding government debt, rates rise. Soon the Bank of Canada will follow suit. Uppa she goes, starting in April, with eight increases expected in the next 24 months. The cost of borrowing $2.5 trillion (what we owe) will more than double. It could triple. And then Justinomicss will fail, or the CBs let spending and inflation rip.

So, back to real estate. People who bought in the last few days, weeks, months or since 2019 are facing a similar deal. Mortgages at 1.9% (or less) allowed for massive loans that are cheap to carry. In return, house prices could inflate since byers could afford to finance additional debt – even though incomes were flatlining and the virus whacked GDP. This was also both a phenomenon, and historic. Totally abnormal. And now it’s over.

CIBC economist Benny Tal was making some headlines again his week explaining what swelling mortgage rates are doing. It’s a flood. The kiddos are besieging bankers, asking for pre-approvals at current rates before they jump further. That means they’ll be buying within the next 90 days before those commitments run out. “There is no question about it that we are borrowing activity from the future,” says Tal. Big demand now. Exhausted later.

Now, look at the situation in which these newbies are jumping headlong just to get a cheapo loans rate.

Here is the inventory picture for the GTA, for example (it’s a similar story in every major market). The number of available listings has collapsed, from 12,000 last autumn to below 3,700 now.

Number of properties listed takes a dive

This is a decline in inventory of almost 60%. We’ve explored the reasons this is happening recently, and high prices that don’t allow sellers to trade up is perhaps the greatest. At the same time, speculative investing in residential real estate has exploded. Some people estimate 25% of all sales, everywhere, are to folks who already own. It’s an old story – people crave what is going up, and will pay a big premium to get it.

So, more mortgages being approved. More demand from investors. Interest rates rising. House-lusty Millennials seriously infected with FOMO. Boomers too thick to sell. And a crashed level of listings. The. Perfect. Storm.

Regarding real estate, Benny’s right. We are pulling demand from the future and applying it now. The second half of 2022 may be as barren as the first half is frenetic. Been thinking of downsizing or moving? Sell now with a long close.

As for government, that steaming pile of obligation now financed at the lowest rates ever is our collective mortgage. It’s never going away.

When I first went to Parliament in 1988 the Mulroney gang was desperate to reduce the carrying cost of the national debt. Interest rates at 9% meant a third of the entire national budget was being piddled away in interest charges, crippling spending – and the accumulated debt was ‘only’ $300 billion (what Justin now borrows in a single year).

The solution: the hated GST, followed by a Liberal government that slashed spending, including healthcare, to suture the blood and save the future.

But that’s when men were men.

About the picture: “Thanks once again for helping me keep my finances on track over the years, and thanks also to all those who take the time to comment with intelligent posts,” writes Ben. “It’s rare and enlightening to see such a cross section of readers from our country, and all over the world share different viewpoints. This is Piper, my kid’s dog but my walking partner. Piper, a Labradoodle loves the water, kids, fetch, and snacks, and pretty well anything else with anyone who is willing to spend time with her.”