Finance Committee on March 23rd, 2023

[Michael Gregory]

The way that amount of $350 billion is calculated is that before the pandemic, Canadians were saving roughly 2.5% of their income. The moment we hit the pandemic, the savings rate went well above that.

[Greg McLean, Conservative, Calgary Centre, AB]

Mr. Gregory, I'm asking you a direct question. Is your number, $350 billion, before the 14% housing slide or after?

[Michael Gregory]

These are as of the fourth quarter of 2022.

[Greg McLean, Conservative, Calgary Centre, AB]

It's as of the fourth quarter of 2022—the $350 million. Thank you.

Mr. Gregory, in Alberta, people have walk-away mortgages, unlike in most other provinces. If that option was available in every other province in Canada.... How much of a hit to the balance sheet of the banks would be taken because of the downturn in housing markets, if Canadians walked away from mortgages they were underwater on?

[Michael Gregory]

I'm not that familiar with that particular aspect of the mortgage market. Therefore, I can't really comment on that.

[Greg McLean, Conservative, Calgary Centre, AB]

Okay, let me ask another question from your comments.

You spoke about a 2% last-quarter inflation rate in Canada versus 5% in the United States. Is this a blind spot, or is this a pretense that inflation is much higher in the United States than it is in Canada?

[Michael Gregory]

The 2% was in reference to headline inflation over the last three months. If you want to really compare apples to apples, you're looking at around a 3% pace in Canada for core inflation, versus around 5% in the U.S.

There's definitely more stubbornness on U.S. inflation. That is reflective of—

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you. That's exactly what I'm asking here. Is it a difference in calculation, or is it a difference in the effects felt by citizens in each country?

[Michael Gregory]

It's partly a definition. However, you also have more rapid wage inflation in the United States, and U.S. households have actually begun to tap their accumulated excess savings. They're continuing to spend in the face of higher inflation, which is not the case for Canadian households. Hence, our inflation seems to be cooling off more quickly.

[Greg McLean, Conservative, Calgary Centre, AB]

Would the Inflation Reduction Act—pardon me, the “inflation exacerbation act”—of $360 billion U.S. be having an effect on inflation in the United States, and can we expect the same if we have another $50-billion deficit budget here next week in Canada?

[Michael Gregory]

The Inflation Reduction Act—and, to your point, the name is a bit of a misnomer—over time does contribute to deficit reduction, and from that perspective it could be disinflationary. Part of the Inflation Reduction Act deals with keeping health care affordable, which, of course, helps keep inflation down, particularly health care costs. The other part of that, of course, is supports for the transition to clean energy—

[Greg McLean, Conservative, Calgary Centre, AB]

Excuse me, Mr. Gregory. I'm asking a direct question: Can we expect the same inflation in Canada if we commit to spending tens of billions of dollars in this budget that's coming up next week?

[Michael Gregory]

That's a hypothetical question. I really can't comment on that.

[Greg McLean, Conservative, Calgary Centre, AB]

Well, it ties into the whole nature of the fact that, if the government is spending money, we're going to have to raise interest rates to keep inflation down. Do you agree?

[Michael Gregory]

It depends on what it's being spent on. Any money that's spent on improving the capital stock and improving productivity actually helps the inflation dynamics over the long haul. As my colleague, Mr. Jean, said, it depends on what policies are currently being practised.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. McLean.

Now we'll go over to the Liberals.

Mr. MacDonald, you have five minutes, please.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Mr. Chair, and thank you to the guests here today.

I'll jump on the interest rate issue, and maybe this will go back to Mr. Gregory.

While they're paused, we know that homeowners are feeling the pinch, but we're not witnessing a high number of mortgage borrowers in arrears. How would you characterize the stability of the housing market?

[Michael Gregory]

Obviously, the market is weakening off. Prices are falling. Activity is falling, and that will likely continue. However, again, we're not seeing a lot of “For Sale” signs. Listings are falling alongside a lower demand for homes. It's almost like a balanced situation as we move to lower, more affordable prices.

[Heath MacDonald, Liberal, Malpeque, PE]

Mr. Gregory, would you suggest that the targeted spends by the federal government throughout COVID-19 and thereafter are playing a specific role in our ability to recover more quickly than most other G7 countries?

[Michael Gregory]

When you look at the global picture and at the extent to which governments around the world provided support for their economies, Canada and the United States, for example, were near the top of that support, which I suspect helped in how quickly we recovered. Of course, restrictions in Canada were a bit longer lasting than those in a lot of other jurisdictions, so we may not have seen that yet in the numbers.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

Now that the housing sector is starting to correct itself, we're starting to see investors trying to move away from market investments in housing, like rent. If yes, what does this do to the local economies or to the residential aspect of housing?

[Michael Gregory]

Part of the reason we ended up with such a frothy housing market was that we were getting an increasing role of investors—not people who were making homeowner-occupied purchases but people who were doing that as an investment, either to sell it down the road or to rent it out, or whatever the case might be. Usually the arithmetic of that decision depends on how much it costs to borrow the money and what the prospects are for potential capital gains. Well, as we know, home prices have been falling, so that particular aspect of it has been moving in the wrong direction. Also, of course, borrowing costs have gone up quite significantly.

I think, not surprisingly, the housing market has cooled off in large part, or at least in significant part, due to investor demand for housing cooling off.

[Heath MacDonald, Liberal, Malpeque, PE]

Larger companies are deferring payments and redemptions or limiting withdrawals on the market side, which, as you just indicated, could have a strong possibility of affecting our local economies and possibly helping our housing market at the residential level.

In that scenario, do you feel that more people now are starting to invest in decarbonizing, in companies that are looking at decarbonizing?

[Michael Gregory]

Honestly, when individuals are making their investments and are looking at opportunities down the road, clearly anything, I think, in the sphere of taking advantage of this transition we are going to make to zero carbon, zero neutral, neutral carbon, is going to be.... A lot of the activity...a lot of the resources in the economy are being diverted over time.

You just have to look at what's happening in the mutual fund or ETF industry, where funds are being traded [Technical difficulty—Editor] where investors can take advantage of that, and they are.

[Heath MacDonald, Liberal, Malpeque, PE]

Quickly, green bonds issued.... There's been a majority made by corporations but, cumulatively, by financial corporations to date. It seems to be that there's some confusion on the green projects that are being evaluated by investors because of that scenario.

I'm just wondering if there's anything the banks can do to correct that, because investors do not necessarily know which are the green projects, to some extent. The banks are coming in second, but as a lead in the financing on the whole project.