Tiff Macklem has put the brakes on and the Canadian government is pressing on the gas pedal. This is the big dilemma Canada is in right now and it's going to lead to stagflation. We all know that government outrageous spending cannot be good for the inflation fight which is only going to make Tiff Maclean's job that much harder.
I believe this is not good for the real estate industry. Here are a few of the problems:
1) Canada doesn't have a solution for solving the supply of homes to be built issue. We need immigrants that are going to be building homes not the ones that take advantage of our welfare system or healthcare services. Why doesn't Canada focus on that before signing off on over a million foreigners per year entering this country.
2) A large government trade deficit means the government spends more than they receive on taxes. More spending to the private sector is inflationary especially when there's more money chasing fewer goods. The government is trying to bolster the GDP numbers so that it shows up as a positive number. If you just focus on the core consumer and the real gdp per capita then Canada is already in a recession. It's embarrassing that with all of this immigration Canada's fourth quarter was essential flat.
3) More immigrants mean rents are going to push higher at the same time they're trying to control inflation. This is only going to incentivize more people to be living under the same roof and splitting the rent costs. In other words, the dreams of having the ability to one day own your own house are pretty much over. If rents go up in value then that means home prices go up in value. If inflation is a persistent problem, then inventory levels will remain low for quite longer.
Canada is entering a stagflationary crisis. When you have the government at odds with the Bank of Canada then it's going to make the fight that much more challenging. I'm worried for Canadians. I believe interest rates may have to go higher especially when the government is adding more fuel to the fire.
Let's remember that Canada's policy rate is 4.5% and the inflation rate is 5.2%. In the past, the interest rate always had to remain at restrictive levels to bring down inflation. If future expectation for inflation is 4-5%, and your policy rate is 4.5% then all that means is inflation at 4-5% becomes the new 2%. It will not necessarily bring down inflation unless you increase the unemployment right and/or have a recession. In order to accomplish that, you have to crank up the policy rate to reach restrictive territory.
The Government of Canada is just delaying the inevitable recession and making it harder for the housing market.