Pie in the Sky

Happy Monday Morning!

The federal government will unveil their budget this Tuesday, ironically on the same day CPI data drops. They’ve already promoted billions of dollars in new spending in pre-budget announcements. Including more than $21B allocated to housing, which we discussed last week.

In essence, the feds are paying for zoning. If provinces commit to rezoning single family houses to allow multiplex they’ll get cash for infrastructure. If they refuse, the feds will bypass the provinces and go directly to the municipalities.

It’s bold policy, it’s just a shame it took 9 years to get these guys moving. The housing crisis is so deeply entrenched it will take decades to fix. Yes, decades, despite pie in the sky goals.

The feds think they can build 3.9 million homes by 2031. For context that would be 3x the record number of completions in a single year and you’d have to do it for six consecutive years with interest rates at their highest levels in two decades.

I don’t care how much land you rezone, if new housing projects don’t pencil, they don’t get built.

Yes the feds are trying to change the math, they’ve recently removed GST on new rental construction, provided cheap construction loans through CMHC, and are now increasing the capital cost allowance rate from 4% to 10%. All meaningful policy that will stem the bleeding.

They’ve also increased amortizations to 30 years for first time home buyers using CMHC insurance, a policy that will only apply to new home purchases, ie a coye way of providing additional liquidity for developers.

There’s just one problem, interest rates are still high and market uncertainty has left a lot of developers paralyzed, like deer in headlights.

If the feds want to see any immediate success from their new housing policies they’ll need rates to come down, and quickly. BoC’s Macklem noted this past week that the “door is open” for a rate cut in June, we shall see. Markets are still expecting 75bps of cuts this year, which even then won’t be enough to stave off the recent slide in housing starts.

Again, rates need to come down which only emphasizes the importance of this weeks budget.

Finance Minister Chrystia Freeland has said the deficit will not increase in this year's budget, so we’re told- which means tax increases are coming. But don’t take my word for it.

"I'm pretty confident they will raise revenues because they've squeezed themselves on their fiscal situation and they continue to commit to spending that is not sustainable," said Robert Asselin, senior vice president of policy at the Business Council of Canada and an adviser to Bill Morneau when he was finance minister. He is also a former adviser to Prime Minister Justin Trudeau and former prime minister Paul Martin.

You see there are no solutions, only tradeoffs.

Ironically the intense desire to keep housing starts from rolling over is actually counter cyclical, pro-growth, inflationary policy- at least in the near term until housing completions ramp up enough to slow rents and shelter inflation.

Despite all the talk about rates coming down, bond yields have been moving higher for most of this year. What does that tell you?

Stay nimble out there.