Home News Canadian Real Estate To Fall Double-Digits, Or “I Would Be Shocked”: BMO Director

Canadian Real Estate To Fall Double-Digits, Or “I Would Be Shocked”: BMO Director

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Canadian real estate shouted in a discussion between two celebrities on Bay Street. Benjamin Leitzes, BMO The managing director of Macro Strategy and the host of the Views From The North podcast mentioned a double-digit drop in home prices in the not too distant future. Together with guest Joel Pursky, the two discussed how unusual rates have been for the last 15 years. Recent moves and rising inflation may be horrifying, but they indicate a return to a healthier market. The most important points from the two chats are:

“Shock” if Canadian real estate prices don’t fall by double digits

The interview focused primarily on bonds and touched on Canada’s debt levels. Canadians are more caring than Americans, so they are more sensitive to rate hikes. The more likely households are to value hiking, the slower consumption will result. Prices have not reached January 2020 levels, but the impact on real estate has already been confirmed.

Home prices and sales have cooled following rising interest rates, suddenly ending unsustainable movements. “Things are off [highs] Very quickly, and probably will continue to do so, “Reitzes said.

He added, “That is, if home prices don’t fall by two digits in a relatively short order, you’ll be shocked. Putting them back on the trend is like a 20% or more drop in home prices. Is a little different, but it will probably be a difficult time. “

The rate of increase is not uncommon, the policies of the last 15 years have been

Most people think of the decade ending in 2020 as a new common sense, but it’s far from that. After the global financial crisis, central banks provided liquidity to help recover. Being a liquidity provider as a last resort makes sense — for a while.

The problem is that it has been done for too long and is causing moral hazard to the general public. There is no shortage of media articles claiming that these levels of rates are disciplinary. However, interest rates are lower than in January 2020. In Canada and the United States, labor markets are tight and inflation is skyrocketing.

The low interest rate crowd is urging the central bank to abandon its last resort position. Instead, they want the central bank to mitigate the undue risk they have taken.

Prussky, managing director of BMO Capital Markets, told Reitzes that this may be over. “I like to think of the last 15 years as an extraordinary time in the history of global interest rates, not what the future holds,” he said.

“I think we’ve reset to a more reasonable level of interest rates above 3%, but before we make a call, we need to see where inflation will settle and where it will settle overnight.”

The market forgets the price of risk

Traditionally, when inflation and risk are rising, interest rate costs rise to slow demand. Interest rates are lowered to stimulate demand when inflation and risk are declining. This is a typical business cycle problem, but it is not well accepted by central bankers. Business cycles are more often constrained by “unconventional” monetary policy tools. The result is moral hazard, where few people understand the cost of risk.

Prussky said: All I read every day is how terrible the Treasury’s liquidity is. So we’ve been in Canada for years and of course it’s terrible. The Fed has bought too many bonds for a long time and forgot how to find a liquidation price for risk. I do not understand”.

In other words, returning to the market in the 2010s cannot return to normal. It was a low rate experiment that mainly helped create moral hazard. As interest rates and inflation return to more traditional figures, the market may return to a healthy level of risk.

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