Is Canadian real estate a bubble, and is the Fourth Industrial Revolution setting us up for even further inequality? These are just a sample of insights former Bank of Canada (BoC) Governor Stephen Poloz shared with us in our interview last week. For those that don’t have time to watch the whole thing (you probably should), here are the five most important insights for Canada’s economy.
A House Is Like A Bond, As Rates Go Up Prices Go Down
Home prices are like bonds, and respond to interest rates the same way other asset markets do. Higher rates mean home prices are likely to adjust lower, and that’s expect. It’s the same mechanics, lower rates and higher prices, we just witnessed, but in reverse.
“Everybody had to know that a house is just like a bond. The house delivers rental payments to you. If you own it, you don’t have to pay the rent. Therefore it’s delivering that every month… and when the interest rate goes from zero or really close to zero, to a more normal number, that price has to revalue. That’s the same thing that happens in stock markets, and in bond markets. A house acts the same way.”
— Stephen Poloz
Loose Fiscal Policy Will Drive Rates Higher
Canada’s government, at various levels, can help tame inflation by adopting tighter fiscal policies. He doesn’t think this will cause a recession, but not adding new spending can prevent the need for even higher interest rates.
“We could make a less risky path here, if fiscal policy were able to be tighter… you don’t have to put the economy into recession, you just have to snug it. And for sure, you’d use this time not to do something extra. You know? To stimulate the economy and work at cross purposes with monetary policy, because that’s just a recipe for rates having to go even higher. Having more of the risks we’re talking about show up.”
— Stephen Poloz
The interview was conducted a week ago, and since then the Federal Government has announced additional spending. In addition, today’s already-rock-bottom unemployment numbers came in even lower, indicating the economy is still running hot. A hot economy means even more inflation, and thus higher rates.
It appears Poloz made the right call. This morning, mortgage expert Rob McLister shared that the overheating economy pushed the forecast for Canada’s terminal lending rate to a whopping 6.7%. Nice call, Poloz.
Canadian Real Estate Has “Bubble Features”
Canada’s real estate market has froth and “bubble features”, but it’s ultimately supported by strong fundamentals. It’s unclear what it means for prices in the short-or medium-term, but it does indicate a downturn is unlikely to be catastrophic, or lead to stranded assets.
“Whether it’s a bubble? I don’t know, fundamentals are super strong. It’s hard to distinguish between a market that’s adjusting to its fundamentals, and one that’s in a bubble. Probably we had some bubble features, I would say. But not that big of a bubble. Fundamentals are super strong.”
— Stephen Poloz
Expect A Recession, But It Won’t Be A Long One
If there’s a recession, Poloz doesn’t see it being deep or long. He sees this as a correction of excess, and fundamentals will cause the economy to bounce back fairly fast.
“We’re still in a good place. You know, unemployment’s super low. There’s lots of good jobs available. There’s jobs empty, etc.. So we just need an altitude correction. It shouldn’t be very painful. So if the plane levels off, that’s okay. If it has to go below 35,000 for a little bit, then come up to 35… That’s a recession probably, but it wouldn’t be a big one. So it wouldn’t be a long one.
“And so I don’t think we’re in for a nasty period.”
— Stephen Poloz
The Fourth Industrial Revolution Will Cause Further Inequality
… It’s not all good news though. The Fourth Industrial Revolution is here, and that will cause a global shift in the world that is likely to be “disinflationary.” Also the topic of his new book, he dives into the five tectonic shifts that will shape the future economy: demographics, technology, income inequality, debt, and climate change.
The former central banker explains about 15% of the world’s workforce will be disrupted, and that will cause rising inequality and political division. This is typical of industrial revolutions, and we’re likely to see it occur during this transition as well.
Full video:
He’s full of sh*t
He’s full of it.
a bit of a bubble, maybe …? just snug it?
he’s so is clueless it’s sickening and offensive.
He has to say the world isn’t ending to prevent panic. In the end, it is his opinions – and opinions can be wrong.
‘Canada’s real estate market has froth and “bubble features”, but it’s ultimately supported by strong fundamentals.’ Which fundamentals are those? Money laundering, rampant speculation, commodification of housing and 20 years of artificially low interest rates?
Fundamentals are super strong, we have strong fundamentals… who are trying to convince Mr. Poloz, yourself or we the little people?
Real estate is an emotionally driven market…. FOMO, abetted by super low interest rates. With population growth, demand will only fall so much. Fully commoditizing real estate has been a horrible failure.
Also.. The role of immigration I think can’t be understated. We need to really actually address it with our leaders. I work in the environmental field with a background in political science as well. In my opinion, … Massive immigration leads to social unrest if it happens too quickly AND.. it does nothing to address one of the biggest problems in our world – overpopulation. In fact, it only exasperates it extensively. And it doesn’t align at all with Trudeau’s supposed ‘green’ and CarbonNeutral credentials. There’s absolutely ZERO hope of him meeting his goals, especially with an extra 1/2 million coming every year. I think the dude is the perfect Manchurian candidate, honestly. He’s so feckless and gullible that he’s easily manipulated by financial elites in this country/big business lobby, who want the cheapest labour possible.
There’s no shortage of workers in this country. There’s a shortage of innovation and industrial automation. Wasting people on stupid, no-skilled jobs like fast food and retail is a waste of resources.
From my 1989/1990 experience the recession in house prices will last 5 to 10 years. According to this site housing contributes 9% to the GDP which is way too much. Construction will slow significantly putting many in construction out of work furthering the recession. Rates may come down next year, but it cannot go back to the 2020 levels, or we will have this issue again.
1. Steve Poloz – 9th Governor of the Bank of Canada
In office June 3, 2013 – June 3, 2020.
2. In July 2017, Poloz raised the Bank of Canada’s key interest rate to 0.75%, the first interest rate increase in Canada in seven years.
Should I say he’s “The Guy Who Made This Mess” or it’s obvious?
Funny how someone in B.C. can make over one million profit on selling thier home, yet still qualify for triple gst rebates, oas supplement and other freebies.
I found Mr. Poloz’s comment about immigration (targets) putting a sound ‘floor’ under the housing market rather odd.
You want to put a ‘floor’ under housing prices (and rents, if not now, then very soon) that are already out of whack of local median incomes? Even if 65% of homeowners across the country don’t have a mortgage currently (data from earlier BD articles; but I wonder if these homeowners are actually all working Canadians), that’s another 35% who do. And for those who will need their own housing from this point forward, looking at the latest Housing Affordability Monitor produced by the National Bank of Canada (2022 Q2 report, dated August 16, 2022; you can find it online), for Toronto, the months of saving required for the down payment of a median non-condo residence (at a savings rate of 10% on a median income) is 382 – that’s 31.8 years – just for the downpayment. For Vancouver, it’s 472 months – 39.3 years – again, just for the downpayment.
Are the waves of newcomers (as of early November 2022, now at 1.5 million through to 2027; source: cbc.ca Nov. 8th), supposedly needed to support 1 million ‘unfilled jobs’, going to earn around the same median wages for their local areas as indicated in the report ($73k – $91k), or are all these 1 million jobs going to earn anywhere from $80k – $262k (or more) in qualifying income to support the prices (based on an urban composite of all home types within each area) as of the summer of 2022?
I respect Mr. Poloz and his contemporaries have much more knowledge about economics and finance than I do, but these simple facts seem much more applicable as ‘fundamentals’ to me.