Better Dwelling’s Opening Statement Before Canadian Parliament’s Standing Committee on Finance

Opening Statement by Stephen Punwasi

Better Dwelling

Appearance before the House of Commons Standing Committee on Finance

March 24, 2022

Good afternoon Committee, and thank you for the invite.

My name’s Stephen Punwasi, and 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 behavioral 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 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 is lowering interest rates to increase the demand for goods, especially mortgages. The goal is 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 roll out quantitative ease (QE). QE is an unconventional monetary policy tool used only to create inflation. It doesn’t shine your shoes. It doesn’t make your coffee. It only has one purpose — to create 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 applies to every part of goods and services, not just the final product.

For the longest time, we assumed 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 low rates lowered the cost of housing, and whoops, not what happens. They found consumers adjust their budget to incorporate the excess credit available, thus inflating the price of homes 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 points — more than double the target rate. Remember the QE program mentioned earlier? The one with the single purpose of creating more inflation? It was still running at this point, as Canada’s banks literally wrote to clients to say the central bank was recklessly ignoring its own research.

It’s like the Bank of Canada is stepping on the gas and saying the car won’t slow down due to external factors. There is a supply shortage failing to meet demand, is the narrative.

Let’s talk about that request quickly. This isn’t regular demand, but demand stimulated by low interest rates. BMO estimates a third of existing home sales are “excess” due to low rate stimulus. Sales are just off the record high, not an economically repressed level that needs stimulus. Low rates don’t stimulate selling, though. It only creates more competition to inflate prices.

Once again, the goal of expansionary monetary policy is to create inflation. Demand is supposed to outrun supply to create inflation.

About a third of existing-home buyers are investors, excluding corporate holdings. In Toronto, a quarter of housing is bought by investors — a mind-blowing amount for a market its size. They aren’t fulfilling their passion for being landlords but 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, but 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 the price of all goods. Excess demand, not a shortage of supply, is an intended consequence when flooding a market with money.

To review, the Bank of Canada lowered rates to create inflation. When they weren’t producing enough inflation, they flooded the market with billions in credit via QE to generate more inflation. Now they think it’s external factors driving inflation higher. We don’t need Nancy Drew to figure out where the inflation actually came from.

Thank you.

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