Price hike risk smooth very a lot alive in Canada: Scotia’s Derek Holt

Let's bring in dererk Hol vice president and head of capital markets economics at Scotia Derek thank you so much for joining me uh those were some really pointed words that you wrote in your note uh yesterday just take us through your thinking and Analysis when it comes to the foreign buyer ban sure thing okay so listen this has.

Always at best been a low singled digigit percentage Point share of home sales in Canada it's not been the main driver the main driver of the uh heat that we've had in the Canadian housing market for many years over a smooth cycle has been the domestic buyer and the domestic buyer in the context of mismanaged Supply we've done a very poor.

Job as a country in terms of our policy makers across all levels with respect to serially over stimulating the demand side while not doing enough on the supply side it's convenient and politically expedient to blame Foreigners for that it's factually false yet from a policy perspective you can really flip the switch on at least.

Killing Demand on the margin right keeping those foreign buyers out and then dealing with on the demand side it just takes longer to build homes it gives you a little bit of breathing room yeah I mean theoretically but at the margin it's a pimple on the housing market I mean it's not going to do anything in that sense in in my opinion.

And and it's being fought by what they're doing in other population control measures like uh very very strong immigration that I've long supported in terms of the need over time to raise our uh immigration quotas in order to deal with an aging population and the exit of from the workforce of the the Baby Boomers uh but not.

Overnight and we were supposed to plan in advance for these things on things like housing and transportation and infrastructure uh Social Services health education our schools our hospitals and we didn't do any of that we just flick the switch and and we are allowing excess number of individuals into the country while at the same time we're.

Saying you know people don't don't buy our homes if you're not living in Canada it's policy in congruency at its worst and and and let's bring that to that that demand side to the housing numbers that we've been getting for Toronto but we also got Vancouver and Calgary are you surprised by the the sudden surgeon sales.

Activity yes and no I'm surprised it's happening in January and December because I've often joked that there are only two types of people that tend to move in January in this climate people have to move out of necessity or masochists because we know how bad the climate can be at times and January was a pretty cold month February not so much.

So far but U so I'm surprised that it's happening this early but I'm not surprised about the direction in fact I've long told a narrative that has said that the spring housing market in this country would be absolutely ripping and and I I think I can point to a long list of probably at least a half a dozen reasons behind that and so it's just.

Happening a little bit earlier than I would have thought does that mean that that the spring selling season could be even hotter because that's when in theory we start to get rate Cuts or at least we a lot closer to them um I think for other reasons other than rate Cuts in our our view we've uh we don't expect the First Bank of Canada.

Rate cut to come until September um and a lot has to go smashingly right in order to even to get to that point in time and so we're not we're not really talking rate Cuts I think it's more of a story having to do with the fact that this economy created 430,000 jobs last year the fact that wages are accelerating at an astronomical Pace.

Even wild product is tumbling immigration is very very strong housing Supply is very deficient firsttime home buyers have been amassing bigger down payments to capitalize upon slightly cheaper prices and so at the margin I would expect a Feeding Frenzy in the housing market to be driving prices back upwards again as we go off into the.

Spring Market let's go back to that view you don't see rate Cuts until September are we on hold until then or is there a risk that we could even hike rates yes there there's definitely that risk I didn't like the way the bank of account to manage that risk I thought the way the Reserve Bank of Australia did last night uh was better they they kept it in.

The statement that listen we we're probably done but it's we can't remove the risk of a rate hike and the Bank of Canada took it out of its statement but kept it in the governor's um opening State opening comments to his press conference and so it seemed like a bit of an inconsistency I I think there's still very much rate risk uh rate hike.

Risk alive in Canada um what we're seeing in terms of some of the purchasing managers indices and the service price inflation and the pass through comments across many many sectors of the economy is still pointed in that direction the housing imbalances are also pointed in that direction rent pressures this isn't just a one trick.

Pony in terms of driving inflation risk in Canada we have an undervalued currency uh that's still stoking some import price pressures we have excessive immigration no housing Supply wages that are growing well beyond productivity people are getting paid more for producing Less in this country and over time the combined effects are.

Inflationary very different than the United States I might add their wage gains are being paid for by productivity their immigration is at a lower pace and so they don't have quite the same imbalances that are inflationary that that we do in Canada that's a Litany of issues as we hear from Tiff mlam this afternoon the speech comes out at 12:45.

On the effectiveness and limitations of monetary policy in the past around housing um he he hasn't necessarily taken that on um other than to say yeah yeah yeah you know those mortgage costs and rent costs went up and that necessary function of of sort of increasing rates on the flip side um does he have to take ownership of of you.

Know cutting rates and what that could do to the housing market okay sure so I I like a comparison to how Governor paa played this uh going back to say 2015 2016 and in the ensuing aftermath um he basically said look I can cut rates I can keep them relatively low I know that it that leads to a deterioration in housing.

Affordability and heats up housing markets but I've got inflation at one handled pace and I've got trimmed mean CPI the banks one of the banks preferred measures also relatively low back then you can't say that today I think the governor governor mclam has to be much more sensitive to the totally different context today that that we're getting.

This source of another serial source of upward pressure upon uh inflation through some categories like service prices going forward and and uh and housing in the context of inflation expectations that are unmowed toward the top end or above the bank of Canada's 1 to 3% policy target range um and in the context of evidence of changed Behavior.

That's a dangerous signal to a central bank that's almost a lights out signal that inflation expectations are unmowed people don't believe in what they're hearing from the Bank of Canada that they'll control inflation and therefore they are demanding aggressive wage gains in collective bargaining and other exercises and so I think the the.

Governor has to take that into context instead of dismissing housing he has to put it in the context of how this is another serial shock that leads people to believe that you'll never get control of inflation going forward so continue to demand excessive wage gains and will have this ongoing spiraling effect and and yet you know I hear you talking.

About from the employees perspective we got the bank of Canada's business Outlook survey from business owners it painted a very different picture of of inflation expectations yes and no I mean it was still toward the upper end of the bank of Canada's 1 to 3% policy target range uh and so it's I still think we're in an.

Environment of pass through risk regardless of what they're saying in those surveys the pmis indicated that most of the respondents said that they intend to pass through higher wages uh with explicit comments on both sides of the Border actually in Canada and the United States we saw the same thing in ISM Services the price signals from.

Every single sector of the US economy saying that they plan on raising prices outside of the agriculture forestry and and fishing and some of those categories in both countries and so you're you're getting quite broad price pressures in the services category that's still in that pass through mode Derek thanks so

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