40 Million Canadians!

The estimated population of Canada has reached 40 million (link to Statistics Canada information). Although reaching that level is not particularly important, it highlights a shift that is somewhat surprising for those of us not paying close attention to Canadian statistics. The figure above highlights the increase in Canadian immigration, particularly after the pandemic dip (which reflects the border closing). I have never needed to pay attention to Canadian demographic data before — since population growth was quite slow due to falling rate of births. Although immigration was a source of population growth, it was not too significant. However, population inflows are a factor that cannot be ignored, and they matter for the “Canadian Housing Crisis” debate.

One thing to keep in mind that I believe the series I plotted above includes net international student flows, which are large. The United States made it more difficult for foreign students to enter, and so there was a hefty reallocation into Canadian universities.

(Statistics Canada has an interactive dashboard of population statistics here, for people who want to take a look at the data presented in way better than I have time to do.)

Housing Bubble (or Not?)

This leads into the status of the Canadian Housing Bubble. Researchers at the Dallas Fed have created a database of international house prices, and I have seen people plot the same chart multiple times, comparing the house price to income ratio of Canada versus the United States. The chart looks crazy, but I believe that it is missing some context. All the versions that I have seen have dumped multiple countries into the same chart, I have instead just shown Canada. I have not had time to look at the data, but it seems consistent with other data that I have seen. (One of the problems with Canadian data is the limited availability of housing data.)

• The top panel shows nominal house prices (according to whatever series they used) and nominal disposable incomes. I have rebased both series to 100 in the first quarter of 2000, for reasons to be explained. The immediate problem with these data is that they are indices, while the sensible initial comparison is nominal house prices to nominal incomes.
• The bottom panel shows the ratio of the two indices (rebased to 100). Since this is a ratio of an index to an index, its level has no economic significance; all we can so is see whether it is rising or falling.
• I chose 2000 as the rebase point because that is roughly when Canadian house prices took off, forming a hockey stick chart. (The house price data chosen by the Fed researchers puts the hockey stick somewhat later.) However, that level was not a “fair value”: house prices in Canada (outside of a few localities) was cheap. Winnipeg and Montreal (the two cities I have mainly lived in) essentially saw no nominal house price between 1980 and the mid 1990s (working from memory on the CREA house price series that I no longer have access to). We bought our first house (a 3 bedroom townhouse) in Montreal at the end of 1998 at a price that was about 150% of the median Canadian after-tax household income. I believe that a closet in London (England, not Ontario) would have cost about the same at that time at the prevailing exchange rates.
• The cheapness is not obvious in the chart above, but one may see that the bottom panel ratio shows it is roughly the same in 2000 as in 1980 — and interest rates were considerable higher in 1980.
• Real estate is local, and there were two large pockets of high house prices — Vancouver (and Victoria) and Toronto. Vancouver is easily understood — it is one of the few places in Canada where old people are not risking hip injuries stepping outside of their homes in January, and construction is confined to a handful of valleys amidst a mountain range. Vancouver house prices have been notoriously (relatively) expensive since the 1970s. Toronto has more open space around it, and what has happened there is that people have been forced to commute longer and longer distances to the city centre. It is not surprising that house prices close to Canada’s financial centre are high. Both Toronto and Vancouver had a condo bubble and bust in the early 1990s (coinciding with one in the United States).
• The hockey stick after 1998 was the result of the progressive loosening of mortgage insurance standards. (All mortgages with loan-to-value above 80% must have mortgage insurance, which must conform to a minimum standard.) This loosening allowed the rest of the country to emulate the experience of the United States where subprime lending became a force in the early 1990s, and also put more fuel into the Toronto and Vancouver markets (which bumped into maximum mortgage sizes).

The above background is aimed at the chart that I have seen reproduced multiple times that allegedly indicated that Canadian house prices were more “overvalued” than American in the mid-1990s. Putting aside Toronto and Vancouver, that was not true until the American housing market broke in the Financial Crisis.

I have been bearish on Montreal house prices since the mid-1990s, and I was concerned after 2010 with what I saw as excessive construction and the collapse in lending standards for mortgage insurance. However, the lending standards were tightened, and the immigration wave blew my “excessive construction” fears completely out of the water.

Grab Bag of Comments

• If one wants to dig into the state of the Canadian housing market, one needs to look into metrics of borrower vulnerability. That has been a topic on policymakers’ minds since the Financial Crisis, and there is now more data available. I have not had time to dig into these new data sources.
• Housing bears need to learn to be patient. As long as the labour market is in decent shape, nothing interesting is going to happen. My concern has always been that there will be a nasty self-reinforcing feedback loop: the high level of employment in construction means that if the housing market tanks, it feeds into the labour market. However, that has not happened, and the immigration wave has been enough to absorb any excess supply.
• There are pockets of silliness, possibly buoyed by dubious cash inflows from overseas. However, this is a story aimed at condo markets in some city centres, and we could just end up with a localised blow up (as in the early 1990s).
• I find that analysts spend too much time worrying about house prices. Unless you are buying or selling a property, the important concerns for housing economics are debt service and construction activity. What I am seeing locally is that there is such a backlog of construction and renovation projects that there is limited sensitivity to house prices.
• As for the drop in house prices at the end of the chart, I looked at the Teranet-National Bank House Price Index™️ and I see a roughly 10% round trip up then down from 2021 to 2022 to present. This is not incredibly surprising given the behaviour of interest rates over this period. Although the chart looks ominous, in the absence of another rate hike campaign, a “sideways correction” is an entirely plausible outcome. Conditions were unusual and 2022 and they unwound — which does not necessarily lead into “the bubble is popped and the housing market is taking the express elevator down!”
• Rising interest rates creates a strain on household finances — particularly since the longest period interest rates can be locked in practice is 5 years. However, a spike has already happened, and the Bank of Canada is well aware of this vulnerability on a forward-looking basis.

Ever since the Financial Crisis, there has been periodic excitement raised by foreign analysts predicting the collapse of the Canadian housing market. Unless the business cycle is upended elsewhere, I would remain cautious.

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(c) Brian Romanchuk 2023

The Canadian "Fiscal Crisis Of 1994-5"

I have now arrived at the part of the preparation for my panel that I have dreaded: the Great Canadian Fiscal Crisis of 1994-1995. This is an event that Canadian Establishment figures will talk your ear off about if you bring up Modern Monetary Theory (MMT). My problem with this crisis is that I spent my working life staring at charts of yields, economic data, and exchange rates, and never even noticed anything unusual during that period in Canada. It was only much later that I heard about this alleged crisis. (I was out of the country until August 1994, and too busy teaching my first course as a postdoc in engineering to notice what was happening in the markets or the news.)

Bank Of Canada Goes Just Plain Nuts

OK, the title might be too dramatic, but the hike of 100 basis points on Wednesday was somewhat out of the ordinary. Since I am not interested in selling any particular forecast, my interest here is the angle: what does this mean? Unfortunately, the answer to that is not entirely clear. The Bank of Canada (BoC) seems to have fallen in with the crowd that argues that rate hikes ought to be done in one massive hit, and then we wait to see what happens.

Canadian Protest Comments

I have seen a large amount of bad takes on the protests in Canada. This article covers concrete issues as briefly as possible before turning into political analysis. I divide the article in three parts — economic impact, some background points that many seem unfamiliar with, and then the political side. Unless something radically changes, I do not see much of an economic impact at the national level.

Interest Rate Policy Versus Alternatives

One of the ongoing arguments about Modern Monetary Theory (MMT) that I run across is the general disdain for monetary policy among MMT proponents. (At one extreme, Warren Mosler argues that interest rate policy works in a way that is backwards versus the consensus.)

Bank of Canada Comments

The Bank of Canada released its October 2021 Monetary Policy Report, and I just want to make some brief comments.

I would summarise the report as follows: the Bank of Canada has ended its balance sheet expansion (“Quantitative Easing/QE”) in order to have the capacity to raise rates if needed in 2022. Although the bond perma-bears that dominate “serious” economic discussion will welcome this, this can also be seen as a statement of the obvious. Inflation has been running above target for some time, and that is not immediately expected to turn around. If inflation is not back closer to target by the end of next year, it would be very hard for the BoC to claim that it is an inflation-targeter. However, for the bond bears to have anything other than short-term vindication, inflation indeed has to not settle down in 2022.

Canadian Shelter Inflation Poses Difficulties

The July CPI report for Canada, and as expected, the annual rate of inflation remains high courtesy of comparisons to lockdown pricing in 2020. I am largely on the side of “Team Transitory”: the punchy annual inflation rates will subside once we are past weak comparisons, and some of the supply disruptions are cleared.

Sustainability And Canadian Housing

Economic data are starting to recover from the distortions created by the pandemic, and so lazier analysts like myself can get a better handle on the current state of the economy. Although I have an interest in inflation, I want to also see what is happening in the real economy.

Rising Interest Rates Is A Good Thing For Governments

Worries about the effects of rising interest rates on government finances is a standard feature of editorial pieces. However, a floating currency sovereign should not be analysed in the same way as a household or business. An individual should reasonably worry about the effect of rising interest rates on their finances; if they face financial failure, the side-effects are not enough to affect macro outcomes. This is not the case for a central government: interest rates reflect macro outcomes, and the analysis needs to take into account why interest rates are rising.

Canadian Establishment: "Deficit Myths? Yes, Please!"

The Canadian Establishment has launched a full-court press against lax fiscal policy of the Trudeau government. It would be only a slight exaggeration to say that they are calling for austerity (at least not immediately), but rumours of policies like Universal Basic Income are causing alarm bells to ring. The Canadian economic establishment is very much wedded to sound finance beliefs, courtesy  of the Great Canadian Fiscal Crisis of the early 1990s.

Comments On Canadian Inflation Risks

There has been a cabinet shuffle in Canada, with the Finance Minister position moving from Bill Morneau to Chrystia Freeland. Newspaper reports hint at philosophical changes, moving towards a more free-spending strategy. Although the messaging might change, I would lean towards changes in practice being incremental. It is entirely possible that economic differences were played up to move attention away from other political concerns about the old finance minister.

Although supply disruptions might be tied to a bump in the price level, telling a story about sustained price increases -- inflation -- seems awkward, even with looser fiscal policy.

Moving To New Steady State

My argument has been that economies would return to a steady state path, with certain industries crippled (e.g., mass tourism), but other industries able to operate. My guess was that Canadian provinces would show some dispersion based on how they handled the containment of the virus. That guess so far was incorrect, as Canadians actual behaviour seems relatively uniform, and the virus appears relatively well contained. Instead, the American states are more likely to show deep divergences (which appears to be a consensus view).

Moving Into The New "Normal"

My local economy appears to be moving towards what is best called the New "Normal:" a state of muddling through in such a fashion so as to keep the spread of the coronavirus under control. From an economy-watching perspective, the closest to clean data for Canada and Quebec will appear in June. Since the latest official unemployment rate data (above) is for April, the implication is that it will be considerable time for the data to catch up.

Bank Of Canada: Repo Printer Go Brrr!

The Bank of Canada has completely restructured its balance sheet in response to pandemic stresses, causing it to resemble that of the Federal Reserve (above figure). The size of the balance sheet has exploded, creating yet another time series terminated with a vertical line. If we look at the assets, we see that repurchase agreements ("repos") went from a nearly insignificant asset to about half the balance sheet (as happened in the Financial Crisis of 2008).

Quick Comment On The Difference Between Provincial And U.S. State Finances

There has been a lot of interest in state and municipal finance in the United States; a recent publication is by Alexander Williams (link). This article qualitatively outlines the key differences between U.S. state and local finances and that of the Canadian provinces.

As a disclaimer, I am working solely from memory, and want to stay away from specific data. My comments here are based on my experience as working as an analyst in a fixed income portfolio where our mandate was against provincial bond indices.

Limited Passthrough From Exchange Rates To Inflation: Canadian Example

The inflation story in Canada and the United States has not been particularly exciting for some time, and I am not in a position to argue that this will change any time soon. I just want to update a chart that I think is extremely useful when discussing the alleged external constraint on floating currency sovereigns. As seen above, even Canada -- a small floating currency sovereign with a economy highly open to external trade -- has extremely limited passthrough from exchange rate movements to (consumer price) inflation.

Sustained Unsustainable Trends: Canadian Edition

I have not been commenting on Canadian data recently, but I just wanted to update the above chart of the debt-to-disposable income ratio. (It caught my eye as I was inserting the chart into my manuscript.) It was very easy to declare the rise in the debt-to-income ratio "unsustainable," yet it has been sustained for a long time.

Regional Recessions And Fiscal Policy

Regional economic divergences add to the complexity of recession dating. The fact that economic conditions vary across the country also complicates the policy response to recessions. The emphasis on automatic fiscal stabilisers in Modern Monetary Theory reflects this reality.

(This article is an unedited excerpt from my manuscript on recessions.)

Comments On Turning Points And Recessions

One of subtle issues with recession analysis is defining when they occur. For the United States, the National Bureau of Economic Research (NBER) has managed to become the authoritative source for recession dating, whereas for other countries, the dating process is less clear. In Canada, the C.D. Howe Institute has created a Business Cycle Council which has a mandate to date recessions: https://www.cdhowe.org/council/business-cycle-council. The chart above shows the post-1990 history of real GDP growth and the recession dates as defined by that committee. There are two declared recessionary periods: March 1990 - April 1992, and October 2008 - May 2009.

Charts On Canadian Construction Employment And Recessions

I just wanted to post a couple of charts I plan on using in a chapter on the construction industry. It acts as an update on the Canadian employment situation, a topic I have not commented on in a long time. As the chart above suggests, not much has changed, but the construction industry is still of over-sized importance.