Canadians risk economic collapse owing to Liberal fiscal, monetary and housing policies
It may be too late the right the ship
Housing in Canada comprises over three times Canada’s Gross Domestic Product (GDP) or about $6.1 trillion in 2021. Aggregate mortgage debt in Canada in 2021 amounted to $1.7 trillion according to Statistics Canada.
Statistics Canada reports Canada’s nominal GDP (that is, current dollars) was $1.8 trillion in 2020. Growth in the value of the housing sector was fueled by artificially low interest rates during an extended period of Quantitative Easing (QE) following the 2008-2009 global financial crisis. For those not familiar with the term QE, it comprises the central bank buying bonds to drive down interest rates with the parallel increase in monetary supply mitigated by the bonds so purchased sitting on the books of the central bank. As long as the higher money supply was not distributed to consumers, QE was a stable tool to force lower interest rates.
One corollary of the lower rates was a surge in housing prices driving up the value of the housing stock as mortgage rates fell to all-time lows, some as low as less than 2%. People entering the workforce were encouraged to buy homes either as their own residence or as investments and prices in the Greater Toronto and Great Vancouver area ran up into the millions for a modest home. Across Canada, home prices in current dollars tripled in less than a decade.
Six million Canadians have mortgages and 1.7 million have Home Equity Lines of Credit (HELOCS) according to the Canadian Mortgage Trends website.
Canadian mortgages can be fixed or adjustable (also known as variable) rate (ARM), and most mortgages must be renegotiated every five years. 22% of mortgages outstanding have variable rates and all HELOCS have variable rates. Assuming the principal balances of outstanding mortgages are normally distributed across this population, about $400 billion in mortgage debt is variable rate and each 1% increase in the prevailing interest rates adds $4 billion to interest payments by the 1.2 million people saddled with these variable rate obligations - ~$3,300 per mortgagee. Mortgage rates have risen about 3 percentage points since the Bank of Canada started raising rates to curb inflation, making the burden faced by these homeowners include a $10,000 rise in annual interest payments. If mortgage rates hit the teens (as they did in the early 1980’s when my own mortgage was renewed in 1983 at an 18% interest rate) many Canadians will lose their homes.
I should point out that the Canadian inflation rate in 1983 was 5.86%, below the current rate of inflation.
Even more Canadians are impacted by the rising costs of credit card debt, HELOC interest, and the higher renewal rates for fixed rate mortgages some 15 to 20% of which face renewal each year. Those renewals will typically be at rates 3% to 4% above the expiring rate and four times as many people will be impacted over the next five years as are hurt by their ARM’s. About 2.5 million Canadians will face these challenges this year and that number will rise every year during this period of rising rates.
Credit card debt already carries very high interest rates, typically at least 15%. Aggregate credit card debt in Canada is an estimated at $80 billion. The average credit card balance is less than $3,000 and consumer credit is not a major risk at this time. But more and more Canadians are having to rely on credit cards to make ends meet as higher interest rates and inflation cut into family budgets and this situation could move from manageable to problematic.
In short, Canada is facing a debt crisis and housing markets are going to become unglued.
The Bank of Canada pretends they didn’t see the crisis coming, noted above in the last bullet point from the clip on from Canadian Mortgage Trends (above) stating the Bank of Canada established an expectation that short-term interest rates would stay low for an extended period of time. That expectation stretches belief. The Trudeau government spent over $500 billion during COVID and all of that spending was “borrowed money” and distributed directly to consumers or businesses. The rampant inflation we are now experiencing can be traced to that spending in tandem with inane Liberal “climate change” policies that pretend CO2 causes global warming and stifled output of oil & gas. Today, there is a global shortage of oil & gas driving prices for these vital commodities to high levels (as high as the BTU equivalent of $500 U.S. per barrel for natural gas in the United Kingdom) and little relief on the horizon.
Central banks efforts to control the inflation caused by QE in Western democracies and exacerbated by stupid “climate policies” have seen rates rise sharply but they remain well below the inflation rate. It is unlikely inflation will abate until rates have a “real interest rate” component, that is, are higher than the inflation rate. The inflation rate is now double digits in the United Kingdom, close to that level in Europe, over 8% in the United States and approaching 7% in Canada.
The International Energy Agency (IEA) just declared a global energy crisis. In reality, we are on the cusp of a global financial crisis. The sole path that has an outside chance of averting this calamity is expanded production of oil & gas to ease the supply shortage and bring down soaring energy costs. However the climate nutters filling the halls of power in Washington and Ottawa won’t budge from their lunacy, and I expect energy costs to keep rising, inflation to keep rising, and interest rates to rise to double digit levels within the next year as inflation destroys savings and businesses and economic collapse ensues.
The Bank of Canada is between a rock and a hard place. Trying to unwind their bloated balance sheet with what is called Quantitative Tightening (QT) at the same time as raising rates to curb inflation has the Bank of Canada a walking a tightrope. The still bloated federal deficit ($90 billion in fiscal 2022) must be financed and the Ottawa government cannot keep looking to the Central Bank to fund its excess spending, so the risk of a “buyers’ strike” is ever present. The Bank of England experienced just that risk when Liz Truss became Prime Minister for a short six weeks and announced a tax cut which triggered a rapid rise in the the market rate for “gilts” - the United Kingdom term for government short term debt obligations. Only an immediate reversal of the tax cuts and a return to Bank of England bond buying (QE) avoided that buyers’ strike becoming a financial crisis in that country. Paradoxically, Truss’ tax cuts and removal of the ban on “fracking” comprised the right policies to reverse the British economic problems but rather than being embraced by Parliament led to her ouster as Prime Minister and the election of Rishi Sunak, an ardent proponent of the climate change nonsense infecting Whitehall.
For Canada, the situation is dire. The Bank of Canada is correctly focused on reigning in runaway inflation which if not stemmed will devastate the economy, meaning that central bank QE can no longer be a piggy bank for Trudeau. Canadian households are being strangled by the combination of rising interest rates and high inflation and cannot reasonably fund the Trudeau spending plans with higher tax payments or purchases of government securities. Foreign direct investment in Canada is falling quickly.
The key question is where will the money come from to pay for Trudeau’s plans to increase spending? Like lemmings rushing towards a cliff, the Trudeau Liberals double down on stupidity by persisting with plans to triple carbon taxes, increase spending and raise tax rates on both individuals and corporations by tinkering with rates for Employment Insurance and Canada Pension Plan contributions.
Prime Minister Trudeau and Finance Minister Chrystia Freeland live in a Disneyland fantasy world outwardly confident that things will correct themselves but devoid of any solid understanding of how the economy or markets work. They are going to get a lesson of historic proportions. Joe Biden is no better, although he is so out of touch with reality it is unclear that it matters what he thinks and his power is about to be bridled as the U.S. mid-terms see control of the House of Representatives and possibly the Senate pass to Republicans who have no times for the “progressive policies” that embody little more than profligate spending and foolish attacks on the energy industry, a formula sure to make the coming rout even deeper than American might otherwise have faced had the Administration had an ounce of common sense.
The only light at the end of the debt tunnel is the burgeoning oil & gas industry which is benefiting from higher commodity prices and paying record levels of taxes and royalties. These companies paid $48 billion in taxes and royalties in fiscal 2022 and over $500 billion since the year 2000. Without this vital industry, Canada’s economic malaise would already be in crisis.
But Trudeau’s policies are antithetical to energy industries and rather than embrace the opportunity to ease Canada’s debt problems by encouraging oil & gas development, Trudeau continues to pump out specious “climate change” rhetoric and enact policies to throttle the oil & gas industry’s potential success. Stupidity has become the underpinning of policy under the Trudeau Liberals.
For Canada’s housing market, the grim outlook will cure the “housing affordability” issue by crushing existing owners who took on too much debt and flooding the market with forced sales. Expect to see home prices fall 30% to 40% within the next year or two.
The stupidity of the Trudeau government is only matched by the silliness of the federal NDP under Jagmeet Singh who keeps Trudeau in power when ousting him from office may be the fastest way to avoid or at least mitigate the looming problems and Singh is too determined to keep his tenure in the Commons long enough to qualify for a lifetime indexed pension to put the interests of Canada first.
Unless the electorate can oust Trudeau within the next year or two, it may be too late to avoid a full blown economic crisis with disastrous consequences for Canadians. With the fate of the Canadian economy in the unlikely hands of Jagmeet Singh who props up the Ottawa Liberals for personal gain, I fear the worst.
But don’t worry, Trudeau’s announcement of a GST tax credit of a few hundred dollars per household and a $500 “rent abatement” payment to low income Canadians will save the day. Yeah, sure. After all, Trudeau “has our backs”.
Canadians will soon learn that turning your back on Trudeau may be fatal to your health, both financial and personal.
Is there another country I can migrate too that is not leftist and is safe? to retire?
CAN is a typical Western society: population naively trusting "those above" and unable to imagine that there could ever be serious problems. Politicians hypermoralistic, contemptuous of "the proles" and convinced that government spending has no limitations. Western societies have lost modesty, the willingness to work and a feeling for their own vulnerability.