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vince and family

This is my family just before we broke ground on construction of our new family home — Winter 2022.

Almost two years later (and many more grey hairs to show for it), we are just about completed the build, and gearing up to move in (finally!).

Lots has happened over the last two years… especially in real estate and the financial system. One thing that has not changed — my decision to NOT sell our current family home.

Those that know me, know that I preach about owning and holding good quality hard assets (even better if they are cashflow positive!).

To me, there is still no better hard asset than a single-family home, in a good neighbourhood.

When we purchased this home back in 2011, I told my wife that we will never sell this house.

I would be lying if I said I haven’t been tempted to sell…

..especially during the run up in prices over the last few years…

..and even more so as it became very apparent that my construction budget for the new house was not worth the paper it was written on, lol (this is a story for another day).

So why am I hanging on to it, you ask?

Especially given all of the uncertainty in today’s crazy real estate market — I’ll tell you why..

…in addition to the sentimental reasons at play (this was our first home together and our three kids were all born in this home).

I remain steadfast in my belief that asset prices will continue to increase over the long term, and a good, cashflow positive single family home will be harder and harder to acquire.

And here’s some reasons why I feel this way… check out these charts produced by my friends at Rock Star Real Estate…

gta house prices vs m2 growth

Okay, so what are we to look at here, you ask… This is average price of a house in the GTA (between 1968 and 2023) versus the growth in the Canadian M2 Supply.

What is M2? To simplify it, M2 is the amount of ‘new’ money being added to the economy. When you hear people talking about the government ‘printing money’ — this is what they are referring to.

What this chart shows is that, when M2 goes up, so does real estate prices.

Assuming we can agree that increased money supply translates to increased real estate prices, then the next question is… will M2 continue to increase?

Again, looking at this chart… you will see that the M2 supply is always growing.

Our Canadian Central Bankers (the people that watch over our financial system here in Canada), are really only a one trick pony — they can increase or decrease the money supply and/or interest rates.

And when it comes to interest rates, historically, to protect the value of our currency we have always just copied the interest rate policy of the U.S. Federal Reserve (the Central Banker in the United States) — so if they increase/decrease interest rates, then we follow suit.

So on that basis… controlling the money supply is the primary go to tool of our Central Bank.

So what’s happening with the money supply right now?

Canada Money Supply M2

According to this chart, M2 supply (i.e. ‘new’ money entering the economy) in Canada is going up again as of the last quarter! Despite the higher interest rates!

Our interpretation — the high interest rates are finally starting to show their impact on the Canadian economy… and if they are going to continue to keep pace with the interest rate policy of the US (higher rates for longer), then to try to offset the drag on the economy caused by the high interest rates… they will continue to grow the money supply.

Could this be why we haven’t seen real estate prices plummet, despite record pace interest rate hikes?

What impact does this extra money in circulation have on real estate prices when interest rates inevitably come down at some point?

In my simple mind (and I assure you… it is very simple), the formula is…

Increased M2 = positive for real estate prices
Lower interest rates = positive for real estate prices
Increased M2 + Lower interest rates = real estate prices on steroids (think 2020-2022)

So although everybody is focused on whether the Bank of Canada will hike, pause, or drop rates, in the short term… for those playing the long game… it’s all just noise.

Long term, it’s hard to see a scenario where prices don’t continue to go up… And that’s without even addressing the other simple fundamentals like the supply and demand of houses (a topic for another day).

As I always say… all we can do is try to provide ourselves with an information advantage… and based on the information currently at my disposal…

…I’m betting on real estate prices to continue to go higher in the long term… and that’s why I’m going hang on to my current house, as long as I can.

All the best,
Vince Castagna