I have been literally thrown out of banks before. Now, it was a long time ago and its always a stretch to say such a thing, but perspective sometime can grow more vivid with time. Over a career I have seen quite a change in the agricultural credit landscape. In the 1980s when I started, capital was scarce, equity was eroding, and interest rates were over 20%. Now a days, well, you know.
It is a redefining time, one in which I find hard to get around on. I ran into an old high school friend the other day, who was saying all the same things. Then he told me he just got done buying another farm which was over 7 figures. We both laughed and I told him about my problems with big numbers. He then exclaimed that he thought he could flip the farm now and make a profit. It’s like there are so many blue skies ahead, so different than the old days of bankers standing on their stools and giving you the Dikembe Mutombo finger wag. Crank up the google machine.
Of course, this new horizon is not limited to our farm world. In Ontario, buying new homes has turned into a sort of gold rush. What once was limited to Toronto and Vancouver has turned into a free for all, as house prices have increased greatly. Everybody knows people who put their house up for sale and settled for six figures over asking price. The house inflation has been exported outside the Toronto GTA area to many areas far, far away from the big smoke, long past transit distance. An argument can be made that our agricultural prices are hot commodities. However, Canadian houses aren’t farm behind. Needless to say, are houses a place to live, or just another “hot commodity”.
The latter it seems. Most people muse how this isn’t sustainable over time. Of course, it’s more than ordinary house buying folk who are wondering this. Our Finance ministers and the Bank of Canada are wondering the same thing. Can there be policy changes to effectively make mortgages even tougher to get to try to slow the housing freight train down. The Bank of Canada is looking at increasing a mortgage stress test to 5.25% vs 4.79 % for mortgages not insured with a 20% down payment. Take a million-dollar Toronto average house for instance. It means it will be quite a bit more expensive.
Will regulatory changes like that cool the housing market. Well, I wouldn’t want to take a chance by laying down on the tracks in front of that train. Governments can do it if they want to, hard to say where this thing will go. As it is, first time home buyers are frozen out of this market in many cases. A new class system is almost being created.
As with farms, much of this has to do with low interest rates and where we are going. There is also Covid 19. For some people, it has meant much hardship with job loss, sickness and even death. For others, it has obviously represented opportunity, with greater savings and a new reality, much of that capital is going back in to houses down the road. Whether that will continue in a post Covid world is anybody’s guess.
In the farm world, land prices are going up too. It’s not Covid related, but more so in Ontario to a concentration of farms in the supply managed sector looking to invest back in land. This has led to farmland being priced far away from urban centre in Ontario priced over $30,000/acre. On top of that, as all of you know, grain prices are higher now and that always brings out the looniness. Farmland prices reflect the good times for those who are buying.
It is hard to know how this might end, or if it will. Never is a long time. One of the goals of any agricultural economist who farms is to manage scarce capital. In 2021 farm capital is not scarce anymore. Equity is growing, which in turn means debt servicing gets easier. It would be easy to say in some cases, crop prices don’t matter, like in areas where supply management dominates, but they do. Our bullish market structure in grains continues.
Low interest rates are partly a choice by central bankers to help stimulate western economies. Do you think its working? Hmmm. Oh, it’s working all right, money is sloshing around like its water in a half full barrel. It has certainly changed our agricultural capital paradigm. Add in the dry weather in Western Canada and the US northern plains and its making for a nervous time. However, prices are healthy, and there are a myriad of money sellers lining up to grease the rails for agriculture. However, those big numbers still scare me. It’s a conundrum I’ll need to get accustomed to.