No choice

That Chrystia. What a card.

“We have been very mindful of acting in such a way that would create conditions that support the decline in inflation, or creating conditions that would make it possible for the (central) bank to bring interest rates down,” she told reporters in Ottawa this week. Without smirking, even.

Of course, we know her latest budget increased already-historic fed spending by another $50 billion. We now know the proposed shortfall this year of $39 billion has been blown away in just a month. We know annual interest charges on the debt increased $2 billion in the last four weeks because of spending pressures. We’ve been told there is no plan in Ottawa to achieve a balance between spending and revenues. And, yeah, we know taxpayers will send $56 billion this year to bondholders to finance the debt – half of which Chrystia’s government created since she joined Justin Trudeau’s government in 2015. The other half took 148 years to amass.

But, hey, not my fault, she says. “We have been conscious of our side of things.”

Her hollow defence notwithstanding, rates will indeed fall next Wednesday, says Mr. Market. Current odds are about two-thirds (67%) that the Bank of Canada will reduce its 5% policy rate by a quarter point.

That ain’t much of course, after ten increases. But it cements the shift from tightening to easing. It will come just as the powerful ECB is doing the same in Europe, and as other central banks reduce the cost of money globally. (The American Fed is unlikely to follow suit until just before the crazy presidential election.)

The rate drop has to happen. There’s no choice. Chrystia knows this, which is why the Ottawa gang is trying to take some credit in advance for what will happen in the second half of 2024.

A senior banker (Phil Thomas at BNS) just put things in perspective by saying it will take up to three quarters (until next Spring) for any rate cut to start improving household finances, plus the economy in general. Meanwhile the banks have been feeling the pinch – which means everyone suffers a little.

“The impact of higher rates is increasingly weighing on consumers and, to a lesser extent, our commercial and small-business clients,” he said on an earnings call with media and analysts. “Although we believe the monetary tightening phase of the rate cycle in Canada is now complete, our prior expectation for multiple rate cuts in the back half of the calendar year feels less certain. The reality of a higher-for-longer rate scenario will naturally result in the continuation of elevated credit provision in our retail portfolios.”

If you don’t care about bank profits, maybe this will underscore why the CB has no choice next Wednesday. If you think we have a housing crisis now, just wait three years and see it turn into a maple-flavoured apocalypse.

Builders can’t build and make money because of current elevated financing charges. Buyers aren’t buying because they await cheaper mortgages. Without presales, the construction guys can’t get building loans. No orders, no financing, no shovels in the ground or new cranes in the air. And so it becomes impossible for Canada to erect those 3.5 million new homes Chrystia’s government has promised, spending billions bribing cities to trash their zoning regs. Quelle mess.

Look at the latest sad stats.

Last month, in the mighty GTA – home of six million – about a thousand new homes sold, half of them condos. That was 56% fewer than last April (which sucked) and 65% under the ten-year average. Only April of 2020 – when we were all going to die wearing masks – was worse.

And look at inventory – now at a 15-year high of just under 21,000 units, which includes 16,478 new condos and 3,614 single-family homes, Unsold. Unloved. In just one region. Says the building industry rep, Justin Sherwood: “The current situation with high interest rates and slow preconstruction levels is creating a critical situation for the future housing supply… and demands the attention of all levels of government to create the economic and investment climate to balance the market over the next several years. Lower pre-construction sales means lower housing starts in the future, lower starts means less housing supply — precisely at the time when we anticipate to see a resurgence of demand.”

He’s right. The glut of unsold homes now will turn into a drought. Prices will rise, not fall. And the longer interest rates depress economic activity, the more disruptive the bounce-back will be.

So, thank dog that Chrystia’s got it all under control.

About the picture: “Here is a photo of dog, Arlo,” writes Atul, another Millennial in Calgary. “Feel free to use it if you ever run out of pictures of cute dogs.”

To be in touch or to send a picture of your beast, email, to ‘[email protected]’.

Source: https://www.greaterfool.ca/2024/05/29/no-choice-2/