Chad Moore Calgary Mortgage Broker

Are we seeing Calgary’s Real Estate market experience inflationary pressure? Or is our price growth simple supply v. demand economics?

Overview:

I’ve written about how money is being created in Canada (link) at a rapid pace in response to COVID shutdown policy. That article pulls back the curtain on how the federal government and the bank of canada create money between them (with keystrokes).

The U.S federal reserve has been increasing the American money supply, through quantitative easing, since the great recession of 2008/2009. Canada’s bond market intervention, our version of quantitative easing, has only just started (April 2020).

I’m finding the general narrative is inflation is coming, or already here. However, on the other hand, Canada’s central bankers report inflation is below the 2% target? How?

I also hear of and know of deflationary pressures in our economy. So what does the future hold? Will we see a massive run up of inflation? Or flat, suppressed deflationary pressure?

Inflationary Pressure:

Instead of trying to make sense of all global monetary policy decisions, and how those trickle into a Canadian inflationary outlook, let’s look at two simple factors that are traditionally inflationary. Money supply and credit expansion.

1. Money Supply.

Fundamentally, increasing the supply of money makes every dollar worth less. For many reasons, monetary policy decisions in the US and Canada have been geared toward increasing the money supply to help the economy. Canadian saving rates have increased, for many reasons too. What might happen in our economy, as these savings are spent?

Here are two images showing the steep increase of money supply in the US and Canada.

United States money supply.

Canadian money supply.

Canadian savings rates significantly grew during 2020. I personally spent less too. As employment confidence returns (in some sectors), and the gut wrenching thoughts of our society falling apart at the seam subside, this savings rate might continue to fall?

Several months back, Canada’s then new minister of finance, Chrystia Freeland, spoke of releasing Canadians savings into the economy (News article link) as a form of stimulus itself.

Simply put, as Canadians begin to save less, spending more in our economy, this would be inflationary pressure (link to image).

2. Credit Expansion.

This is another form of growing the money supply. Credit growth creates money as asset values increase.

Canadian Real Estate is in a period of credit expansion brought about by several economic factors. Two of which are 1) stimulated low interest rates, and 2) reduced capital requirements by banks.

The Bank of Canada is a growing purchaser of longer term Government of Canada bonds. The Bank of Canada is purchasing Government bonds to the tune of $5 BILLON per week (link)! This purchase activity is artificially suppressing bond yields resulting is artificially low fixed interest rates in Canada. This formula encourages borrowing (home buying, refinancing etc) as money is so cheap (supportive of the Real Estate market) and discourage saving (spending).

Canada’s federal banking regulator, OSFI, lowered capital requirements for banks in Canada. Canadian Banks were regulated to hold more capital in reserve, relative to their outstanding loans. However, as part of the COVID economic response, those regulations were eased. Banks are encouraged to get loans out the door!

Why suppress rates and encourage banks to lend?

Canadian policy makers want (need?) ever increasing Real Estate prices in Canada. Higher asset prices help lubricate the economy through increased feelings of wealth and financial spin off. For example, a couple refinances high interest debt into their low rate Mortgage. This imaginary couple has additional home equity to consolidate high interest debt, beyond their regular Mortgage pay down schedule, because their home value has increased. Several months later, they may finance a new auto loan. These types of occurrences help turn the economy.

Calgary home owners of the 2002-2007 and 2011-2014 vintage might remember this being in the general narrative?

To be fair to Canadian Real Estate policy makers, there are several macro-prudential Mortgage qualifying factors in play to quell the rising Real Estate tide. The Real Estate market taps are NOT turned on full throttle. One restrictive Real Estate measure is the stress test. The stress test requires borrowers to qualify for their Mortgage based on a artificially high interest rate (4.79% at time of publication) to gain access to a artificially low market Mortgage interest rates (>2% at time of publication).

Pre-covid, Justin Trudeau and Bill Morneau, were beginning discussions to revise the stress test (blog post link) in an effort to make qualifying for a Mortgage more accommodative and reflective of market interest rates. I’m saying, policy can be eased to assist the housing market in the future, if need be. Policy makers have bullets to fire to continue propping up Canada’s Real Estate market – even if interest rates rise due to inflation.

Inflation Showing Up In Calgary’s Real Estate Market?

In some detached price segments, values are ratcheting up. Quickly! I have several clients losing on bids $15,000 over list price; competing with 10+ other buyers in some cases.

When was the last time you heard of that in Calgary?

Why?

Inventory. Inventory of homes for sale is down in Calgary (link). I’m hearing this lack of inventory is a international Real Estate phenomenon. I guess homeowners are not excited about dozens of strangers entering their homes, without many amenities to visit in the meantime, during a pandemic (shocker).

It is possible many home buyers held off on purchasing a home in 2020 so there is legitimate increased demand. Are these home buyers also enticed into home ownership because of artificially low rates? Have they been saving more money than normal? Are they feeling more confident their incomes are secure? Perhaps a bit of everything?

Is Calgary’s Real Estate market seeing inflationary pressure? I think so. For many reasons. Will more listing inventory become available this Spring to help stabilize supply/demand economics? I think so. How much more is what I am waiting to see!

If you like this article, please consider sharing it. I am also welcome to hearing from you. When you have a Mortgage need, be sure to reach out to me directly. 403-809-5447 or chad@canadamortgagedirect.com.

Talk soon,
Chad Moore