Canadian real estate got a shout-out in a debate between two prominent Bay Street personalities. Benjamin Ritzes, managing director of macro strategy at BMO, and host of the Views From The North podcast, pointed to double-digit declines in home prices in the not too distant future. The two discussed with guest Joel Prosky how unusual the past 15 years have been for pricing. The recent moves and rising inflation may be frightening, but they signal a return to a healthier market. Here are the main points gleaned from the chat between the two.
‘Shocked’ if Canadian real estate prices don’t drop to double digits
The interview focused largely on fixed income and touched on Canadian debt levels. Canadians are more indebted than Americans, and therefore more sensitive to rising interest rates. The more sensitive households are to an increase in their rates, the slower their consumption will be as a result. Prices haven’t reached January 2020 levels, but we can already see the impact on real estate.
Home prices and sales fall after prices rise, abruptly ending an unsustainable streak. “Things have come [highs] “Very quickly and you will probably continue to do that,” Ritzes said.
Adding, “I mean, I’d be shocked if home prices didn’t drop to double digits in a relatively short time. Getting them back on trend is something like a 20 percent drop in home prices. Every pocket in the country is a little different, but it’s probably going to be a tough period.” “.
Price hikes are not uncommon, it has been the policy of the past 15 years
Most people thought the decade ending in 2020 was the new normal, but it was far from that. After the global financial crisis, central banks provided liquidity to aid the recovery. Being a liquidity provider of last resort, that made sense – for a while.
The issue is that it was done for too long, creating a moral hazard for the public. There is no shortage of articles in the media claiming that rates at these levels are punitive. However, interest rates are lower than in January 2020. Labor markets in Canada and the United States happen to be hawkish and inflation is surging.
Low-price crowds are demanding that the central bank relinquish its position of last resort. Instead, they want the central bank to mitigate any excessive risk they are taking.
Brusky, managing director at BMO Capital Markets, told Reitzes that this may be over. “I like to think of the past 15 years as an abnormal period in the history of world interest rates, not what the future will be,” he said.
He adds, “I think when we got past 3% we were resetting to a more reasonable level of rates, but I think you have to see where inflation settles, and where the night settles before you make that call.”
The markets have forgotten the price of risk
Traditionally, interest costs rise to slow demand when inflation rises or risks rise. Prices are cut to stimulate demand when inflation or risks are reduced. They are typical of the business cycle, but they are becoming less and less accepted by central bankers. The business cycle is frequently suppressed with “unconventional” monetary policy tools. Thus, it has created a moral hazard as few understand the cost of taking the risk.
Brosky argues, “…we’ve had since 2008 all this explosion in QT and the balance sheet, we don’t really know the true price of money. All I read every day is how horrible the liquidity in the treasury was. I mean, we’ve tested that in Canada for years, But of course it’s terrible. The Fed has been buying too many bonds for too long and we’ve forgotten how to find the clearing rate for the risk. We don’t know that.”
In other words, going back to what markets were like in the 2000s won’t get us back to normal. This was largely a low-rate experiment that helped create an ethical hazard. With prices and inflation resuming traditional numbers, markets may return to seeing a healthy level of risk.
You may also like