The Munk Debates Podcast - Munk Members-Only Pod: Episode 18

Episode Date: May 7, 2021

This is a sample of the Munk Members-Only Podcast. The program provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates. This week's edition of the Munk Members Podcast digs into three topics: Canada's red hot housing market is projected to surge another 15% in coming year -- Just how big is the bubble Canada's central bank has blown when it comes to home prices and what if anything can be done to prevent a painful repricing of the country's housing stock? -- One of Canada's major pipelines is on the verge of being shutdown by the Governor of Michigan with big consequences for Canada-US relations -- Is there an 11th hour deal to be made? What would be the consequences for Canada to lose access to the pipeline? -- Big thinker Scott Galloway was on the Munk Dialogues this week -- Janice and Rudyard debate his hot take that elite post secondary institutions are bad for society, the economy and flourishing middle class.  To access the full length episode consider becoming a Munk Member. Membership is free. Simply log on to www.munkdebates.com/membership to register. Under your membership profile page you will find a link to listen to the full length editions of Munk Members Podcast. If you like what the Munk Debates is all about consider becoming a Supporting Member. For as little as $9.99 monthly you receive unlimited access to our 10+ year library of great debates in HD video, a free Munk Debates book, monthly newsletter, ticketing privileges at our live and online events and a charitable tax receipt (for Canadian residents). To explore you Munk Membership options visit www.munkdebates.com/membership. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

Hi, Monk podcast listeners. The following is a sample of the Monk members-only podcast. To access the full-length edition of this episode and all of our regular Monk members-only podcasts, go to our website, www.W.Munk Debates.com and register for membership. Membership is free, and it's available for you right now at www.munkdebates.com. Hope you enjoy the program. Hello, Monk members. Rudyard Griffiths here, your host and moderator. Welcome to this. regular Friday monk members podcast. This is when we dig into the big issues and ideas shaping our world. As our guide, we're extremely fortunate to have Janice Gross Stein. She's the founding director of the Monk School of Global Affairs, an internationally acclaimed scholar and author,

and she's all ours for the next half hour. Janice, great to be in conversation with you. And great to be with you, Roger, and all the monk members. Well, three topics. As we do on each show, We pick three issues that we think are worthy of our monk members' attention. We hopefully leave you listeners with some new analysis and insights to take away. And Janice and I have some fun in the meantime. Janice, I want to kick off with a report out this week, which surprised me by the Canadian Mortgage Housing and Loan Corporation. This is the large government entity that provides, in effect, mortgage supports to

individuals and banks to allow them to purchase houses. And the CMHC really has its pulse, obviously, on housing in Canada is the single biggest lender with a portfolio of almost three quarters of a trillion dollars. They are saying, Janice, I find this hard to believe, that housing prices after soaring almost 25% in the last year, are going to increase another 14 to 15% possibly as early as the end of calendar year 2021, early 2022. This to me is remarkable. And to me, it's worrying, Janice. I think this suggests a profound over-indexing of risk in our economy to one single activity,

which is the acquisition, the renovation, the everything to do with housing. What's your take on this? Well, I agree with you. you're right to worry about this bubble. But let's ask ourselves, Roger, is this a bubble or is there value in the real estate? That's the first big question. What do you think about that? Is there value here when we can anticipate a surge in immigration once border controls are up?

We have 100,000 new people in the city of Toronto alone who are going to be given permanent residency. there is crush on the housing market. Possibly. I guess what I look back, though, Janice, and I check out just some of the basic numbers. I mean, at the end of the day, math matters. And we have the highest household debt to disposable income of any country in the OECD. It's over 180%.

And it was already high going into the pandemic. So what we've effectively done is we've become the outrider or the outlier. And it's never good from a policy perspective, from a personal perspective, to be the outlier. Because bad things happen to the outlier because there's something called reversion to the mean. You're right. And we know, Janice, wouldn't you agree that this is one of the kind of laws of economics. Prices go up. At the end of the day, though, they've revert to their means.

mean, and we are so far beyond the mean, we are so stretched, I think we have to acknowledge that something dangerous is happening here. And I'd like your views on what the heck we do about it. Well, look, I'm worried about the housing bubble, but just a little context for our mug members for 10 years. It's almost a religious activity. CMHC, the economist, others write about the housing bubble in Canada. It's never burst. So just, you know, a fact here for all our listeners. I do think, though, we have a big problem. And it's not so much debt to GDP or even debt to personal savings. We're pricing a whole generation of young people out of the market. We're actually reinforcing inequality in this country in structural ways. So for governments that talk nonstop

about diminishing inequality right in front of them is one of the biggest reinforces. So what do we do about it? I actually think the government does nothing, but the CMHC does something. And here's what they do. They have to increase the risk level right now.

We've seen them do it in the past. If they push it up high enough, it will actually stop the frenzy whine. And why CMHC? and not the government? Because interest rates from the central bank, too blunt an instrument. Yes, it might stop the housing bubble, but will depress a lot of other things. Second of all, we need to stop blind bidding.

Do you know of another auction, Roger, where you can go into the auction and not know what the other bidders are bidding? There's no other industry that works like that. It's close to a rigged game when you're bidding against somebody else, but you don't know their bid. Why do we allow this? Here on the second, though, but I'll take exception on your first argument. I think the central bank has a role to play here. You know, you're rearranging the deck chairs and that are Titanic if you think that the CMHC with some tweaks to or OSFI, the financial institution oversight group, you know, with tweaks to down payments or other things.

We tried that before. It doesn't work. a clear ironclad correlation between soaring asset prices and the lowest interest rates in 3,000 years. So what the central bank has to understand, which I'm sure they do. And I think that's why Tiff McClain has had to come out, probably doesn't want to do this and telegraph that there may be tightening as early as 2022. He didn't want to do that. But they're doing it because they know that they have in the response to the pandemic and in crushing savers and in crushing rates so-called financial oppression, they have created a scenario where Canada's already

irrational mania around housing has been supercharged. Janice, a 30% increase in 18 months is an existential risk because housing now represents in Canada almost 10% of our job. GDP. It's the highest portion of GDP of any advanced economy in the world. So if housing corrects, even by 20%, you're knocking off two points of GDP from the get-go. And that's simply a 20% correction. So we have, we've got to be honest with ourselves. We've been lazy. We've used low interest rates for years now to juice growth. And we've over-indexed our economy. to real estate as opposed to other more challenging things like creating great technology, building world-class companies actually being productive.

We'd become addicts to real estate as a cheap way to genie up growth. You're right. You are right about that, that our productivity lags way behind the cost of house in our economy, to put it bluntly. Housing is overrepresented in our domestic market. But the problem, Roger, is interest rates, Tiff Macklin, is not looking only at the Canadian economy. He's looking south with the border. What are they doing on interest rates there? Canada can't be much of an outlier on interest rates without crushing our economy here.

So this is a problem when you're integrated into global markets, and particularly the North American market. Here's a ray of hope for you. Janet Yellen said interest rates in the United States might begin to move in 2022. That's probably what Tiff Maclin was able to come out. Janice, get ready. When interest rates move, you are going to see a violent correction in housing because the debt load is so extreme, 180 percent, the highest in the OECD that we've now become, you know, Benjamin Tal and CBC, their chief economist is great on this point.

we're now hypersensitive to minute increases in interest rates because the debt levels have become so disproportionate. So it'll be very interesting to see actually if central banks let the Janet Yellons of this world argue effectively that rates should raise because rates should go up. But they may not be allowed to go up, Janice, because the debt levels are so high. Canada is, I mean, just a final point here. I know I'm going on a bit, but I really do feel strongly about this. Oh, no.

I don't think of Canada's debt levels have increased over the last year a government, corporate, and individual debt by 70%, Janice. 70%. That's almost a doubling in 12 months across the entire economy. And we were already a profligate country to begin with. As David Rosenberg said, the Canadian economy is built on three things. Condos, cannabis, and credit. That is a, I think, all too, too. true and just a sign of how we've lost the message of the need for leadership on an economy that actually achieves growth through real tangible products and services. Now, to our monk members, Richard does not feel strongly about this issue. He does not have strong views on this. Last night, you said you were the glass half full person.

I'm not sure that you're the glass half full person on this record. Here's a little bit of good news for people who are listening. Yes, government debt has gone up dramatically in Canada. Personal debt too. Well, yeah, but corporate debt also. But personal debt actually, we have the highest rate of domestic savings in this country that we've had in 25 years. Now, you're going to maintain that these are all government checks that have gone into people's personal bank accounts. We'd have to do more tracking in order to know that.

But we actually have increased the rate of domestic savings in this country for the first time in 25 years. So we're not quite a strata, but overall, you're right on this housing bubble. And the reason it's bigger than a bubble, not only could it depress our economic growth if there's a correction. And there's always corrections. What goes up, goes down. So it has to be a correction coming. it's a much bigger problem for how you restore vibrancy to our cities, how you get people to live in our cities. If the cost of housing in our major urban centers, Ottawa, Toronto, Vancouver continues to soar this way,

you're going to see a continuation of the exodus that we've seen from our big cities over this last nine months. And that's not a good thing for the Canadian economy. Just a final point on that. You know, I was talking to a young friend of mine. Well, I'm 50, so the fact that he's 30 makes him seem young to me. And, you know, he expressed to me, I think, just a sense of hopelessness that this is somebody who owns their own small business. They've been successful.

But, you know, they face a lot of taxation. They're heavily taxed, just like all the rest of us. And that's fine. He's okay with that. He believes in public services. But he looks at it. at these assets that he wants to acquire. He wants a house to have a family in.

There's no way that he feels that he can have that, that lifestyle, the home ownership, because the asset itself has accelerated out beyond his grasp. And he has to bear, as we all do in Canada, fairly high marginal rates of taxation. So he's actually now looking at leaving Canada. And I don't think he's, alone. I think there's a lot of young, talented people that we have to be careful about who are

feeling deeply demoralized about that tradeoff between living in a high tax jurisdiction with a lot of government expenditures and a lot of regulation and at the same time not having the upside economically and otherwise to actually reach and stretch out and become an asset owner. You're either part of the asset owning class or you're not these days. It's a kind of new feudalism. Well, I think that's the really big point here, that what's happened in the housing market has shut out younger Canadians, exactly in the age group you're talking about 30 plus or minus, who are giving up on ever owning a home or a condo. Now, you know, look at Hong Kong, look at London, look at New York, these big cities in the world, frankly, these are, nobody has housing stock. in the cities anymore.

These are all condominiums, rental apartments, the lifestyle changes, and people adjust to it as the underlying value of land in big cities changes. And in some sense, Canada, in two cities at least, is on the cusp of that change. And that's a cultural change as well as everything else. But you're right. There are, I worry precisely about that young, talented generation of Canadians. who feel absolutely shut out of this asset class. That's the biggest worry.

Yeah. Well, we'll continue to follow this issue. And I just caution everybody. You know, what comes up, comes down. Reversion to the mean is a powerful analytical tool to look at assets, any asset class over time. You've been listening to a sample of the Monk members-only podcast. To access the rest of the episode, consider become.

a member. Membership is free and available at www. monk debates.com. Once you've joined as a member, go to your membership profile to access the rest of this episode and all of our monk members podcast. Thanks for listening.