It was just two years ago, when Canadian real estate prices were surging to records, that David Rosenberg warned that the country might be in one of the biggest housing bubbles of all time.
Whether that was an apt description for the turbocharged market at that time may not hold up to close scrutiny.
But double-digit price declines did ensue, even if in many regions of Canada it was less than a thunderous burst of an asset class.
Now, Mr. Rosenberg thinks the housing market is no longer in the danger zone. He is among the most bearish observers of the Canadian and the U.S. economies, and he believes both countries will soon fall into a recession. That means there would likely be a forceful move by central bankers to lower borrowing costs, offering an offset to housing prices that are still historically high in many Canadian markets relative to household income.
In this second part of The Globe and Mail’s recent interview with the 63-year-old economist, Mr. Rosenberg offers his latest views on Canada’s real estate sector and the economic challenges that confront the country. The founder of Rosenberg Research, which has grown from a staff of six to 16 over the past four years, also provides some rare insight on what keeps him ticking after 40 years as an outspoken economic prognosticator even in the face of constant criticism that his stance on markets and the economy is often too bleak.
In October, 2022, you predicted Canadian home prices would fall this cycle by a total of about 30 per cent. What’s happened to date is more like 20 per cent. We’re now seeing some positive progress on inflation in Canada , interest rate cuts could be coming soon and clearly many Canadians are getting more interested in looking at real estate purchases again. What’s your current assessment of the housing market?
It comes down to the trade-off between how far do home prices have to go down against how far would interest rates need to come down to bring affordability to a more reasonable level?
At the extremes, either interest rates have to come down 150 basis points from where they are now, or home prices would have to go down 20 per cent, or some combination thereof. So, if the Bank of Canada cuts rates and the mortgage rates go down 150 basis points, there would be no need for home prices to go down. It’s a case of, like, pick your poison.
But I think what’s going to happen is that home prices will probably go down some; I don’t think they’re going to crash. We are seeing visible evidence that the key measures of inflation are actually coming down in the line with the central bank’s comfort zones. And just to cut to the neutral rate [the long-run resting point for interest rates] they’d have to cut rates at least 150 basis points – if not more.
I think they ought to cut rates in April. In fact, I would hazard to say they probably should have cut rates already. I think we will be in a recession between now and the end of the year. And not just here but in the United States. Both central banks will be cutting rates at least 200 basis points.
I’m far less bearish than I was previously. Home prices have calmed down, thankfully. You are starting to see supply come back on-stream. The sales-to-new-listings ratio has come back and aligned with its historical norm. These are all very positive things.
Last spring you called the Liberal government’s actions on pursuing its robust immigration targets as “truly insane” in terms of the its impact on crowding people out of the housing market. Should Ottawa seriously consider a less ambitious immigration policy?
A rethink of immigration policy would be a good idea. Canada has always had a pro-immigration policy no matter who was in power. But I think we now have an immigration policy that’s on steroids … Sometimes there is too much of a good thing, and that’s what we have on our hands right now. You want to ensure that, beyond the humanitarian and refugee situation, the immigrants who come in pay for themselves.
Immigration is actually necessary just to offset the fact that we have, from a purely homegrown standpoint, no population growth. But it’s just too much. It’d be wonderful if we could have 3 per cent population growth, which is what we have, and have, like, 4 per cent or 5 per cent economic growth, but we don’t.
What do we have? We have economic growth that’s a fraction of 1 per cent in an environment in which population growth is roughly 3 per cent. That means our standard of living is going down.
How is it that government spending is 30 per cent higher than it was pre-COVID-19? How is that possible? Wasn’t all the COVID spending supposed to be temporary? But, you see, temporary spending is never temporary; it ends up being permanent. And it’s crowded out business investment.
Look at the ratio in this country of government spending to business spending. And what creates productivity is business spending. There’s been no capital deepening in this country for a decade. It would be one thing and we could afford to have robust immigration. If we had supply-side policies that promoted growth on the capital stock, productivity and economic growth, that would be one thing. But it’s just basic math: Can we really afford as an economy to have this sort of immigration policy?
Ottawa’s recent move to curb temporary immigrants temporarily at least provides me with some comfort that the bureaucrats have finally taken their heads out of the sand.
How do you then feel about the future of Canada right now, given some of the things you just mentioned?
We have a country where the balance of power in the House of Commons is held by a socialist party. Now, if you’re a socialist, that’s great. If you’re not a socialist, not so great. So, I’ll have to just hope that we embark on some serious political reform after the next election.
You ask this question in the immediate aftermath of the passing of Brian Mulroney, who was absolutely transformational for this country. And the tax reform, the energy reform, deregulation – he did us best under tremendous pressure from all circles to contain runaway deficits and debt. He paved the way. He blazed the trail for what Paul Martin and Jean Chrétien were able to do in the 1990s.
What we need to do in this country is find the new Brian Mulroney and the new Michael Wilson [his finance minister], and hopefully we will at the next election. We just can’t afford this immigration policy. It’s utopian to think that we can. We are slipping when it comes to the most important statistic when it comes to our country in aggregate, which is real income per capita. It’s in a bear market.
What can you tell me about what the future holds for you? You are nearing traditional retirement age.
I want to be an asset for investors, to be an important cog in their investment making process. My goal is to improve and to improvise.
A true blessing is the fact that my middle son, Jacob, is my chief operating officer, and I’ve been able to watch him grow as a leader, and mature, and to see how people in the firm look up to him. He’s not even 30 years old. He’s about to get married. To actually have him as my wingman has been absolutely incredible. He’s asked: “Dad, when do you think you’ll retire?” I said, “It’s not a timeline. However, when I start to sound like Joe Biden, you’ve got to say, ‘Dad, time to quit.’”
You’ve been a prolific economist and writer for a long time now. What drives you to keep doing this?
I pour my heart and my guts out every single morning. I get up at 4:20 a.m. every morning. Even if I’m seriously hung over after a night of eating and drinking with friends or clients, I’m raring to go every single day. I’m just passionate about what I do. I just have this extraordinary curiosity. I love the financial markets. I love the study of economics.
Even on the weekends, I don’t sleep in. I’m a restless soul. So, I jump out of bed. Most of the time the alarm clock doesn’t get me up. And I know this sounds extremely weird. I am extremely weird. I never begged for the notoriety, I never asked to become a chief economist – things just fell in my lap. But I’ll tell you one thing: I will never tell you that I’m a better economist or strategist than anybody else out there. I would never, ever say that, because it’s not true. But I’ll tell you this much, nobody works as hard as I do.
Other people do tend to freak out a little bit at my energy level. When I get up in the morning and I go to shave, I look in the mirror and I say, “Who are you?”
But I’m young at heart, and I still have a lot of energy, and I’m just blessed with the fact that I love what I do.
I was always very cautious. I was brought up by Depression-era parents. The concept of savings and being cautious and being diversified are concepts that always resonated with me.
I know that I’m viewed as somewhere between Darth Vader and a radical permabear. But I believe in diversification, I believe in the preservation of capital and the preservation of cash flows. And nobody has ever been blown up under my watch. And I’ll tell you why. Because I don’t swing for the fences. I bunt for singles.
(Answers have been edited for brevity and clarity)
Recent columns from David Rosenberg:
Five reasons BoC rate cuts won’t reignite a boom in Canadian home prices
The Canadian economy is mired in weak fundamentals and investors are taking note
Why the BoC will be forced into cutting rates sooner – and to lower levels – than most people think
Canada is in economic decay. Prepare for BoC rate cuts and big returns in this asset class