The truth is, the Central Banks are trapped

It’s hard to say, but it’s the truth. BOC Governor Macklem’s refusal to raise rates until the Spring of 2022 is simply an admission that the BOC is trapped. If it raises rates, our economy will face more strain and middle class quality of life will be squeezed from higher debt servicing costs. If the BOC crosses its fingers and hopes inflation will go away (which it won’t), middle class quality of life will be squeezed from higher prices. When you keep interest rates at record lows for such a long period, ultra-low becomes the new normal – and it’s hard to take the punch bowl away.


Our economy is incredibly dependent on debt. We’re all depending on our credit cards, mortgages, and lines of credit to keep enjoying the quality of life we’ve been used to. We’ve gotten used to having cheap debt literally thrown at us for years now because of its overabundance. Never in human history has it been so easy and convenient to borrow. For years pundits, academics, and politicians have sent the signal that credit is better than saving, that debt and capital are the same thing, and that borrowing to spend always leads to prosperity. The old mantra was that capital was the accumulated savings of deferred consumption. That you saved and invested. That you invested and produced. That the banks paid you a healthy interest rate to put your money in a savings account. The old mentality was that prosperity was hard won by hard work and sweat – ultra-low interest rates changed all of that.


Unlike the U.S., Canada does not control the world reserve currency. International markets do not need to buy our debt and accumulate our currency reserves to trade. This privilege has allowed America to spend and borrow massively, to live beyond its means, and to export its inflation to the 2nd and 3rd world. The more the BOC puts off rate increases, the more rapidly and suddenly it will have to raise them if inflation continues to go up, or gets out of control – and then we’re in trouble. Either way, Macklem is trapped, and he knows it.

The Housing Narrative is Starting to Shift

Given the BOC’s recent signals that QE is over and that rates will be going up earlier than previously expected, the media narrative is showing signs of change. We’re now seeing more and more articles talking about a market cooldown or of price growth slowing. A blog post on Toronto Storeys exclaims that even if we do get a serious 50% crash in prices, we’d be where we were in 2014.. such has been the growth in valuations. Inflation is no longer temporary, as we all now know and as Tembo expected, so higher rates are now not only strongly anticipated, the question is will they come in the Spring? Or will they come earlier?

The changing media narrative reflects the growing uncertainty that high inflation and a now uneasy central bank are bringing. The worst case scenario experts and housing watchers consider is if significant rate hikes in quick succession rapidly precede a large amount of mortgage expirations and renegotiations – in other words, can people handle the higher borrowing costs? We have to keep in mind that even if rates go up, mortgages get harder to snag, and prices fall, there will be a significant number of buyers who have been waiting for more affordability and who have been more conservative in their lending and debt accumulation. If investors still have access to the market, many will see all of these conditions as ripe to buy, so a worst case scenario actually presents opportunities for many.

What does matter is how the more bearish outlook that we’re seeing affects mentalities and perceptions. Interestingly, all the hubbub has some real estate professionals advising their clients to sell now and take advantage of high prices before uncertainty kicks in with force in the summer and to take advantage of currently low supply (we don’t know how bad inflation will be by then, and we don’t know how aggressively the BOC will raise rates when push comes to shove). In a recent Royal Lepage survey of 950 real estate professionals across Canada, 79% said they would recommend selling this winter, given the current strength of the seller’s market. This is 15 points higher than the 64% who recommended listing in the winter before the pandemic. Never a dull moment in Canadian real estate!

Higher Inflation or Higher Rates?

Two interesting and conflicting headlines on inflation and rate hikes came out recently. One suggests that the BOC will wait on rate hikes until later than expected to stimulate recovery, while another says that the BOC will hike earlier than anticipated to head off persistent inflation. Let’s dig in.

Millan Mulraine of the OTPP (Ontario Teachers’ Pension Plan) was quoted in Bloomberg espousing the former views. David Wold, a portfolio manager for Fidelity Investments was quoted in the Financial Post expressing the latter view. Mulraine sees hikes coming not in 2022, but in 2023, thus ensuring a “full economic recovery” that is “self-sustaining”. Mulraine sees inflation, and a good amount of it – more so than expected. Other economists at TD and National Bank see rate hikes at the end of 2022, slightly sooner than Mulraine’s trajectory. All of their analysis revolved around the timing of when the economy recovers the output that was lost from COVID – and thus when rates no longer need to be ultra-low.

Wold, on the other hand, is more anxious about inflation and supply chain issues. He sees these problems persisting for some time longer than the BOC expects, and thus views a rate hike in 2022 as a must. Wold believes the BOC’s models do not sufficiently take into account the structural changes in the economy COVID has created (serious labour distortions and very challenging supply chain problems). Wold also argues that “spare capacity” and potential increased consumption the BOC is counting on is being soaked up by higher prices. Wold is counting on hikes coming earlier than expected. The disagreement between these two analysts is an interesting example of a growing lack of consensus on the BOC’s inflation and rate predictions from experts.

What Real Estate Changes to Expect Post-Election 2021

Tembo outlined what the three big parties promised on real estate in three blog posts. Given that the Liberals have been re-elected, let’s recap what they promised, and what changes (if any) are in store. Many of the Liberal Party’s promises are designed to put more cash into the hands of prospective buyers – so those measures will end up increasing demand (and thus prices):

  • Tax-Free First Home Savings Account
  • First-Time Home Buyer Incentive
  • First-Time Home Buyer Tax Credit
  • Reduced Mortgage Insurance Fees

Measures against home flipping (a tax), and a temporary ban on foreign buyers were designed to decrease demand, but very few experts and market watchers believe these planks will make a dent on the market.

The big question is whether supply will increase meaningfully. The government’s plan will see capital allocated to developers who are focused on building affordable housing. It remains to be seen if this will benefit the average prospective buyer. The government has had years to implement these kinds of policies, and few have remarked on tangible impacts on the market.

Other changes we’ll see that were promised are likely to have some impacts on actual house purchasing:

  • Blind bidding ban
  • Legal rights to home inspection
  • Price transparency
  • Disclosure of all parties in a transaction

We can’t say whether these measures will contribute to prices levelling off or of demand calming, but they have been called for by many for a long period of time. Blind bidding has become a hated term and has been pilloried by the press repeatedly in recent years. Having enough of a down payment or a mortgage approved is just one fight in the house buying war, bids for available homes are another. How quickly and comprehensively the federal government moves to implement these promises is a big question, let’s wait and see.

How is Canada’s Economy Doing?

Overall, we’re holding fast. August saw 90,000 jobs created across the country (when lockdowns are lifted, jobs come back, when they’re imposed – we lose employment). Our unemployment rate is at the overall historic average, more or less, at about 7.5%. If one were to broaden the definition of unemployment to include those who are ‘underemployed’ – or want to work more hours but can’t – the real rate of ‘labour underutilization’ is at around 15%. This underscores the impact of COVID. The CBC recently reported on ‘labour underutilization’, a rarity for mainstream media.

Some parts of the economy are still slowly recovering from COVID – retail, restaurants, small business, and hospitality. Others are going ahead at full steam (tech., services, fintech.). Amazon Canada recently announced it was raising the average wage of its frontline workers to just under $22 an hour, and that it was in the process of recruiting 15,000 new workers across Canada. The company is also going to pay for up to 95% of the tuition of many of its workers in Canada, as it is increasingly doing so in the U.S., as part of its Career Choice program.

The really big news though, is that there are over 800,000 job vacancies in Canada. This is staggering considering the levels of unemployment and underemployment in the country. Labour shortages are being felt across all regions of the country and in a wide range of economic sectors, from restaurants, to hospitality, to primary industries, the list goes on. Job vacancies increased 22% from May to June, and will likely continue to do so. The business lobby complains that COVID related government benefits and supports are the cause, as people are making more money collecting these benefits than working – especially working part-time.

An Election About Nothing

Election 2021 is finally behind us. The end result of this $600M snap election in the middle of a fourth wave is a parliament that is almost exactly the same as the one that preceded it. As the Liberal Party did not lose any seats, the outcome was not as politically damaging to the Prime Minister as it could have been. Although he lost a good deal of precious political capital in calling this election, taking the risk, and not gaining a majority – for now at least, Justin Trudeau is safe as PM. Over the medium term though, pressures on his leadership are likely to build.

For Erin O’Toole the election was a serious failure. He both failed to increase his seat count and lost a bit of the vote share. He also failed to gain any Tory seats in the crucial 905 mortgage belt or in the city of Toronto. O’Toole is the first Tory leader from the GTA since the party reunified almost two decades ago, and his lack of success in the area is going to hurt him. The Tories actually lost two seats in the GTA (Aurora Oak Ridges Richmond Hill, and Markham Unionville). This speaks to the Tory party’s weakness in the region, the failure of O’Toole’s pivot to the centre, and to the Liberal Party’s local organizational heft and popularity. If O’Toole lost seats in the GTA to a Prime Minister who’s shine is gone and who called an unpopular, expensive election then how will the Tory party return to power under him in the future? Media talk of how O’Toole’s leadership is going to be challenged is already significant (ditto for Justin too).

For the other parties the election was a mixed bag. The Bloc Quebecois won two new seats and increased its vote share – not a bad outcome. The NDP saw a slight increase in its vote share but only gained one new seat – the party failed to recover much of the support it has lost under Singh’s leadership. The Greens gained one seat in Ontario at the expense of the Liberals, but saw its overall vote share fall precipitously, and Bernier’s PPC failed to pick up a single seat. From a strategic perspective, the Liberal Party were the big winners, as they fended off contenders well and actually gained one seat overall (so far). When the next election comes around, it is likely that we could see a whole new cast of leaders (Lib/Tory/Green especially).

The NDP Plan for Housing

In our final Election 2021 housing blog post, we’re looking at the third party NDP’s platform under leader Jagmeet Singh. As is expected for the housing section of an NDP platform, it starts with building affordable housing. The NDP wants to build 500,000 units of “quality, affordable housing” over 10 years. This will be done by:

“Breaking the logjam that has prevented these groups from accessing housing funding, we will set up dedicated fast-start funds to streamline the application process and help communities get the expertise and assistance they need to get projects off the ground now, not years from now. We’ll mobilize federal resources and lands for these projects, turning unused and under-used properties into vibrant new communities.”

In addition, the NDP will waive the federal portion of the GST/HST on the construction of new affordable rental housing units as a “quick, simple” change to help get more units online.

Like the Liberals, the NDP will double the first-time Home Buyer’s Tax Credit, and will reinstate 30 year mortgages, as are widespread in the United States, to lower monthly costs. Finally, the NDP will tackle speculation by implementing a 20% Foreign Buyer’s tax on the sale of homes to individuals who aren’t Canadian citizens or permanent residents. The party also promises to tackle speculation and money laundering, as the other two major parties.

The NDP’s housing proposals are the least detailed and most concise of the two parties, but this could be an advantage in getting their message across to the public. You can read more here.

How the Tories Will Tackle the Housing Crisis

Welcome to the second Election 2021 housing platform blog, with a quick dive into what the official opposition is proposing to do to help Canadians afford homes. The Conservatives are focusing on a platform that addresses four areas, with the first looking at boosting supply.

To “quickly” build 1M homes over three years, the Conservatives will look to transform 15% of the property the federal government owns into residential space. Tax incentives will be implemented to encourage the construction of rental units and for large landowners and businesses to donate property to trusts, and public transit will be paid for under conditions that high density housing be built close by.

Step 2 is rooting out corrupt activities that drive up prices“. This would include changes to the Proceeds of Crime Act, among others, to give law enforcement and prosecutors tools to root out aggressive instances of real estate related money laundering. The Tories would also look at the findings and recommendations of the Commission of Inquiry into Money Laundering in British Columbia, and quickly implement recommendations at the federal level.

Like the Federal Liberals, the Tories would ban foreign investors not moving to live in Canada from buying homes for 2 years, and then reviewing the policy.

The third area of focus is homelessness. The Tories want to focus on rehabilitating homeless people from drug related challenges through an investment of over $300M over a number of years.

Finally, to make mortgages more affordable, the Tories propose to:

  • Encourage a new market in seven- to ten-year mortgages to provide stability both for first-time home buyers and lenders, opening another secure path to homeownership for Canadians, and reducing the need for mortgage stress tests.
  • Remove the requirement to conduct a stress test when a homeowner renews a mortgage with another lender instead of only when staying with their current lender, as is the case today. This will increase competition and help homeowners access more affordable options.
  • Increase the limit on eligibility for mortgage insurance and index it to home price inflation, allowing those in high-priced real estate markets with less than a 20% down-payment an opportunity at home-ownership.
  • Fix the mortgage stress test to stop discriminating against small business owners, contractors and other non-permanent employees including casual workers.

There is very little fiscal firepower attached to this plan, as it focuses on stimulating market forces, leaning on crown property, and incentivizing construction through preferential tax treatment. The Tories will likely hammer away on the need to increase supply throughout the campaign, but so far, the plan shows less government involvement in housing than the other party platforms. The full Tory platform can be accessed here.

The next and final blog will examine NDP Leader Jagmeet Singh’s plans for housing.



How Trudeau Plans to Fix Housing

With Election 2021 on and in full swing, Tembo will dedicate three blog posts to outline what each of the three parties is offering to tackle housing, increase affordability, and help people get their first homes. In this blog, we’ll examine what the governing Liberals have in mind.

At its essence, the Liberal Party is rehashing its 2017 National Housing Strategy. They’ve repackaged and rehashed the older plan into a new, three-point housing pitch. The new pitch is called A Home For Everyone, and consists of:

  1. Unlocking Home Ownership: Liberals will help save a family buying their first home up to $30,000.

This part of the plan starts with a new, tax free First Home Savings Account to help young, prospective home buyers afford a down payment faster. It would combine the features of a RRSP and a TFSA and would allow up to $40K to be saved and withdrawn before the age of 40 tax free.

Another piece is the $5,000 First-Time Home Buyers Tax Credit will be doubled to $10,000, putting an extra $1,500 into the average buyer’s pocket to buy a home.

And another big piece is a new, $1B Rent-to-Own program. This money will be extended to developers to build rent-to-own projects. Ownership must be completed in five years, and rents will be required to be below market. There will also be measures to help people save on closing costs.

  1. Building More Homes: Liberals will build, preserve, or repair an additional 1.4 million homes in four years.

This starts with a $4B Housing Accelerator Fund aimed at increasing the housing supply in our biggest cities, for a total of 100,000 new middle class homes completed by 2024-25. Existing measures to increase affordable housing units and to convert more office space to residential housing will be made permanent. These are measures Tembo has already introduced to our readers in a past blog post. In this sense, this part of the plan doesn’t increase the net flow of funds, and just maintains what’s already going out the door.

  1. And Protect Home Buyers’ Rights: Liberals will create a Home Buyers’ Bill of Rightsto make the process of buying a home fairer, more open, and transparent.

Interestingly, the Home Buyers Bill of Rights will ban blind bidding, establish a legal right to a home inspection, mandating full transparency on recent house sale price on title searchers, and many other measures. The Bill of Rights would force banks and mortgage lenders to offer mortgage payment deferral options for up to 6 months for those who lose their jobs – a clear COVID inspiration.

The Libs are also increasing efforts to ban foreign ownership and speculative activity. A national tax on non-resident, non-Canadian owners of vacant or underused housing that kicks in on January 1, 2022 will be expanded to include foreign-owned vacant land. A proposal to temporarily ban new foreign ownership of housing will also be implemented. 

As always, the Liberals plan to invest further in aboriginal housing, and to strengthen federal oversight of the housing market. All in all, the plan is decent, with some recycled components, some creativity, and some tough measures. Our next blog will look at the Federal Tory plan for housing.

You can read the Housing component of the Liberal manifesto in full detail here.

On The Bank of Canada’s Latest Thoughts (on the economy and interest rates) Part II

Inflation took up a lot of the statement, as was expected. Let’s summarize what the BOC said. First, they acknowledged that the inflation rate exceeds their band. It’s not at a level they’re comfortable with. They then point out that the big driver was gasoline prices, which collapsed at the onset of COVID, and have now returned to their more historic norm – this had a very big impact on the CPI. The BOC continues this point, arguing that many other prices which fell from a drying up of demand when COVID hit rebounded, taking another hit to the CPI metric. And finally, they then point to the international supply chain situation (bottlenecks, shortages, logistical issues, border closures, lack of raw materials, pullbacks in production, etc.). They point out that the overall supply chain complication had a big and fast impact on prices.

Overall the Bank’s logic and argument is strong and well thought out. They humbly admit that “we expect the factors pushing up inflation to be temporary, but their persistence and magnitude are uncertain, and we will be watching them closely.” This is an important sentence. The key point the Bank is making is that high gas prices, price rebounds, and supply chain concerns will all more or less go away by the second half of 2022, when they expect inflation to return to 2%. This is the big question. Finally, the BOC says that their bond purchasing program, or QE, will continue until the economy goes back to more normal growth and inflation subdues.

We can’t underscore how important this statement is, and how important the BOC’s next steps will be. If their analysis holds, we’ll have low rates continue, growth and inflation normalize, and a very comfortable landing from the difficulties of COVID. If their analysis and decision making is off, and if the boat is rocked, we may be in for some ongoing and longer term financial and economic difficulties. Fingers crossed.