How is it that our stock markets and house prices look like this is the best of times? Many people have been scratching their heads lately trying to understand how it is that Canada’s average house price jumped more than 17 per cent during the worst economic crisis to hit the world in decades. There is an answer, but to get to it, you have to learn the same uncomfortable lesson that the head of Canada Mortgage and Housing Corp. learned this year. And that lesson is that we are living in an illusion created by central bank money-printing and excessive government spending. If house prices seem detached from reality, it’s because they are.

As the first wave of the pandemic unfolded, Evan Siddall, head of the government-run CMHC, found himself in a war of words with members of the real estate industry. They were upset at Siddall’s prediction of a house price decline of 9 to 18 per cent in Canada this year, as a result of the economic shock from the pandemic.

The real estate agencies, and some economists at the major lenders didn’t see it that way at all. Some came out with forecasts boldly predicting a rise in house prices amid the crisis, including a prediction of a 6-per-cent jump from TD Bank.

Now we see the industry’s forecasts were not only right, they also massively underestimated the housing boom seen in recent months. So how did CMHC, essentially a government agency, get it so wrong? After all, Siddall’s prediction seemed like common sense, given the circumstances.

CMHC’s mistake was that they were approaching the housing market as if it’s still tied to reality ― that is, the reality of the people in the housing market. They were looking at the unemployment rate, household debt levels, wage levels, mortgage rates ― the “basic ingredients” of house price changes.

But the people who got it right were looking at something else. They understood that house prices today are made from a completely different recipe. They were looking at the shadowy reality of our financial system, where the Bank of Canada this spring began a program of essentially printing money, which it then used to buy government and other kinds of debt.

By doing so, it pushed down interest rates, making it more affordable for the federal government to run up a dizzying deficit amid the pandemic, and also driving down mortgage rates for buyers.The federal government used this cheaply borrowed new money for a series of emergency income support programs that paid out considerably more than the income people lost.

Overall, Canadian households received more money ($56 billion) from government aid programs such as CERB and other transfers in the second quarter, than they lost in wages and salaries due to the pandemic ($23 billion). Household disposable income spiked 11 per cent in Canada. This substantially increased (home) buyers’ purchasing power. A further sign of how detached from reality the housing market is becoming – there is more good news for homebuyers in the form of even lower mortgage rates ahead!