Good afternoon, and thank you for the invite.
My name is Stephen Punwasi. I'm the chief data analyst at Better Dwelling, Canada's largest independent housing news source. Some of you might be familiar with my work, helping to identify the extent of Canada's money laundering problems or the global vacant home crisis. For the rest of you, my expertise is in behavioural finance and the levers that impact the price of assets.
Today I'd like to talk about cats, but I was invited to speak about inflation, so let's do that instead.
Yes, inflation is indeed a global issue. However, it's not because of some outside force of nature. It's due to similar monetary policy missteps rolled out across many countries. Sovereign currency issuers, with a convertible currency like Canada, can control the value of their money and therefore inflation. The key issue is that low interest rates have been too low for too long.
At the beginning of the pandemic, central banks were worried about deflation. The Bank of Canada's primary tool for fighting deflation was to lower interest rates to increase the demand for goods, especially mortgages. The goal was to stimulate demand to overrun supply, creating a non-productive price increase, also known as inflation.
When low rates fail to stimulate enough inflation, central banks will use something called QE or quantitative easing. QE is an unconventional monetary policy tool that's used to create even more inflation. It doesn't shine your shoes. It doesn't make your coffee. It literally only has one purpose, creating more inflation.
It does this by flooding the market with money, providing liquidity to credit markets, and driving down the cost of borrowing. After all, supply and demand apply to every part of the goods and services chain, not just the final product.
For the longest time, we assumed that low interest rates were a good thing. Cheaper money lowers the cost of debt, right? The perfect example of this is housing. A few months ago, the Bank of Canada set out to prove that low rates lowered the cost of housing and, whoops, that's not what happened. It found that consumers adjusted their budgets to incorporate the excess credit available, thus inflating the price of housing across the board for everyone. Buyers didn't see lower carrying costs, but they paid a larger principal.
For the past 30 years, central banks thought they were making housing more affordable with lower rates. It turns out no one did the math until recently.
Why are these points important? In October, Canadian inflation was at 4.7%, more than double the target rate. Remember the QE program I mentioned earlier, the one with the single purpose of creating more inflation. It was still running at this point, and Canada's banks were literally writing to clients saying that the central bank was recklessly ignoring its own research. It's like the Bank of Canada stepping on the gas, and saying the car won't slow down due to external factors. The narrative it's going with is that there is a supply shortage failing to meet demand.
Let's talk about that demand quickly. This isn't regular demand, but demand stimulated by low interest rates. BMO estimates that a third of existing home sales are excess due to the low rate stimulus. Sales are just off the record high, not at an economically repressed level that needs more stimulus. Low rates don't stimulate selling, though. They only create competition, because they are supposed to inflate prices.
Once again, the goal of expansionary monetary policy is to create inflation. Demand is supposed to outrun the supply to create that price increase.
About a third of existing homebuyers are investors. In Toronto, about a quarter of homebuyers are investors, which is a mind-blowing amount for a market of its size. They aren't fulfilling their passion for being landlords; they're looking to capitalize on a capital inefficiency. Overstimulated demand isn't just crowding out end users, but turning them into regular and profitable payments for investors.
Cheap credit isn't just limited to homebuyers with an end use. It's available to everyone. The more leverage you have, the greater your ability to borrow and exploit a system that lends you money at effectively negative interest rates.
I focused on housing inflation, but the same factors drive inflation across the board. Real estate prices are an essential input cost for all goods. Excess demand, not a shortage of supply, is an intended consequence when flooding the market with money.
To review, the Bank of Canada lowered interest rates to create inflation. When the lowered rates weren't producing enough inflation, the bank flooded the market with billions in credit via QE to generate more inflation, and now it thinks external factors are the reasons behind that inflation. We don't need Nancy Drew to figure out where that inflation came from.
Thank you.