Tuesday, October 06, 2009

TD Economics - Real Estate Trends Could Impact Future Path Of Canadian Monetary Policy

I suggest you read this TD Economics report released today. It contains some interesting thoughts about monetary policy and the real estate market across Canada.

26 comments:

RentingSucks said...

What's really annoying is it seems up until this report the Bank of Canada didn't give a rat's ass about a real estate asset bubble forming anywhere. Now that we've had a quick up and down they are saying that as long the already elevated prices don't go too much higher we're OK with leaving rates where they are? I guess at least they are paying attention to the potential of bubbles now but still it may be to little to late.

david said...

Best quote

"Recent Bank of Canada statements
indicate that it is closely
watching the housing market,
expecting its recent strength to
be “temporary”."

The BoC pretty much has ultimate control over the housing market. They cant really do much to make it go higher but they sure could kill it without a moments notice if they wanted to. If they expect the surge to be temporary then they are probably planing a rate hike at some point. They have previously stated that won't be until June 2010, but I haven't heard anything about what they will shoot for after that. The graph looks like it will be around 1% by the end of next year. That might not kill the market but it will have a negative effect on it.


That being said Austrailia just raised their rate 0.25% to, wait for it, 3.25%!!! How on earth the people in Sydney pay almost as much as us (% of income wise) and have almost normal mortgage rates I will never understand. Then again our rate was almost that high a couple of years ago and we were at about the same price as we are now.

patriotz said...

The BoC should not have to worry about RE bubbles. Its only mandate is to preserve consumer price stability. Monetary policy should be directed at the general economy and should not be held hostage by the RE market.

The obvious strategy for countering an RE bubble is to simply limit financing, e.g. for CMHC to raise the down payment requirement or shorten the amortization. Direct the response to the problem and avoid collateral damage to the whole economy.

As to why this is not happening, well the obvious conclusion is that CMHC sees its mandate as funneling as much capital into RE as it can at the highest possible price.

What's really annoying is it seems up until this report the Bank of Canada didn't give a rat's ass about a real estate asset bubble forming anywhere

David Dodge was openly critical of CMHC's move to 0/40 a few years back. But he has since been replaced by more polite management.

David Dodge criticizes CMHC for 'unhelpful' actions

"Bank of Canada Governor David Dodge angrily criticized the Canada Mortgage and Housing Corp. for bringing out new products that he felt would increase inflationary pressures, a just-released letter shows."

RentingSucks said...

So if the Bank of Canada starts to care the person in charge gets removed. Sure looks like CMHC is more powerful than the Bank of Canda then. Is it so powerful that the goverment can't control it? I just don't see how the government benefits from pumping up house prices. Does the CMHC really believe they are helping people afford homes? Is that realy it's goal?

patriotz said...

Sure looks like CMHC is more powerful than the Bank of Canda then. Is it so powerful that the goverment can't control it?

You think CMHC is operating contrary to Stephen "control freak" Harper's wishes? Get serious. CMHC directors serve at pleasure, BTW (unlike BoC directors who have fixed terms).

I just don't see how the government benefits from pumping up house prices.

It makes people feel better off when they really aren't, and creates extra jobs in the short term building excessive housing. What more could the government want?

chadmpnp said...

I was just wondering if anyone has taken into consideration the Canadian dollar in all the interest rate hike predictions? I'm no bond trader but how can Canada increase interest rates significantly with the Canadian $ so high? I can't see how the BoC can even start raising until the States starts raising and Fed officials have said that they won't be raising rates any time soon so while Canada should be raising rates, I don't see how they can.

RentingSucks said...

Yes it's going to be tough to raise rates. Right now they think that the rise in the Canadian dollar is just speculation that will go away if they hold their rates. If they're smart they could just deal with the housing exuberance by elminating 35 and maybe 30 year loans and upping the downpayment from 5 percent. Not sure how likely an insecure minority government would be to do this though. It might make some pople mad. For me though it would guarantee my undying loyalty to the tories (for the next election anyway).

JimTan said...

Hot dogs!

BC unemployment down to 7.4%. Vancouver down to 7.1%


Canada's unemployment rate falls to 8.4%, first decline since recession Module body
By Julian Beltrame, The Canadian Press

OTTAWA - Canada's unemployment rate fell for the first time in nearly a year to 8.4 per cent last month, in perhaps the clearest indication the hard-hit labour market may be recovering sooner than expected.

The September jobs pick-up of 30,600 was five times larger than the economist consensus forecast of 5,000 and - along with a slight decrease in the number of workers looking for jobs - helped drop the national unemployment rate by 0.3 percentage points.

This was the second consecutive month of employment gains.

There was more good news - actual hours worked increased by 1.6 per cent.

More impressive, the agency said 91,600 full-time jobs were added in September, more than offsetting the 61,000 loss in part-time employment.

This reverses the pattern observed most of the past year as employers cut back by first reducing full-time workers to part-time status.

Economists consider employment a lagging indicator because employers usually will wait until they see clear signs that a recovery is underway and will be sustained before beginning to re-hire.

By contrast, the U.S. is still reporting massive monthly job losses even though most believe the economy there has turned the corner and begun to grow.

Canada has seen a fitful rebound from the downturn, although the most recent data on gross domestic product only extends to July and does not capture the next two months of job gains.

If there was a downside to the Canadian jobs data for September, it was that hourly wage growth slowed to 2.5 per cent, the lowest year-over-year wage gain in 2 1/2 years, and that all and more of the net job growth was in the public sector.

Tony Danza said...

Wow, so do you think we've decoupled from the US economy? That's great! It must be nice to believe everything will be just fine regardless of the continuing deterioration of the market that 76% of your sales go to. Typical near sighted Vancouverite.

david said...

It seems the BoC is caught between a rock and a hard place with their rate decision.

On one hand they know these low rates are fueling higher prices and are driving people further into debt.

At the same time if they raise rates it will raise the value of the Canadian dollar which will hurt exports.

And I dont really think the Canadian dollar has been doing amazingly well the past few months, I just think the American dollar has been tanking. It is the same reason gold has been rising so fast; it is priced in American dollars, so then the dollar falls, gold rises.

I think the Fed wants the greenback to be low for a while because it lowers their debt and makes their exports cheaper. This helps get people working, which is their primary concern right now.

david said...

Jim

Read the last paragraph of that article you posted.

"all and more of the net job growth was in the public sector"

This means the gov has just hired more people. I am no economist but if those people get paid by the gov and the gov gets money from taxes, wont this lead to higher taxes?

Tony Danza said...

Cheese and crackers!

Canadian trade deficit hits record

Economist Derek Holt of Scotia Capital Inc. said the $2-billion deficit marked a record high for Canada as exports got “whacked.”

The worse-than-expected trade numbers came out less than two hours after Statistics Canada reported that the Canadian economy pumped out 31,000 new jobs in September, propelling the loonie to its highest level in more than a year.

“Jobs may be a plus on the morning and thus are putting a bounce in the step of the hawks, but trade numbers are vastly disappointing and that punctuates the Bank of Canada's dilemma,” Mr. Holt said in a research note.


Peter Hall, vice-president and chief economist at Export Development Canada, said the U.S. recovery is shaky and the high level of the loonie is “not helping” the situation.

“It's weighing heavily against our export prospects right now and into next year. The effects could be very damaging to the economy,” Mr. Hall said.


These guys don't have a clue, Canada doesn't need exports, take a hint from BC and just build and sell condos to each other, it's totally sustainable!

JimTan said...

Read the last paragraph of that article you posted.

"all and more of the net job growth was in the public sector"

David,

Yes, I read it and understood what it means. The lousy harper government's stimulus is finally kicking in. The multiplier effect (ever heard of it?) will get the economy rolling. This is what a stimulus is supposed to do.

As jobs and spending rises, the government gets income and sales taxes to pay for the stimulus. The point is that an economy has an optimal level of activity. e.g. 87% capacity utilization. It may be necessary to stimulate the economy to get there.

Hope this helps.

P.S. Tony Danza for Finance Minister!

vibe said...

"all and more of the net job growth was in the public sector"

"the government gets income and sales taxes to pay for the stimulus."

Why doesn't the government just cut out the middle man and pay itself?

JimTan said...

"Why doesn't the government just cut out the middle man and pay itself?"

Vibe, What do you mean?

jesse said...

vibe one of the reasons the government is buttressing employment is to try to ensure people are being productive, the alternative is people staying at home on EI, welfare, or giving up returning to the workforce if the bout of unemployment is too long.

The government is trying to invest when the private sector is unwilling to do so. Ultimately if this investment fails to pay off there is a reckoning but the hope is the investment (not willy nilly giveaways) will spur future growth. In 2010 we are coming to a point where the gov't's investments need to start producing returns. If they don't they may attempt to try again or accept the economy needs to shrink. The politics makes it very difficult to remove spending as we will likely see in the next few years.

Here's a question: what would stop the government from spending?

vibe said...

So the increase in tax income from the improvement in the economy caused by the stimulus will cover any costs of the stimulus itself? And won't lead to higher taxes or inflation?

My point wasn't that stimulus won't work to a degree (although I do think you're just moving demand around) but just that it won't pay for itself.

Nothing will stop the government from spending if they don't want to but that doesn't make it a good thing, right?

JimTan said...

"Nothing will stop the government from spending if they don't want to but that doesn't make it a good thing, right?"

Huh! Too deep for me.

jesse said...

Why can't stimulus pay for itself? All the government is doing is taking the place of private investment. The operations by the BOC and the government, while likely coordinated, are not so coordinated they are one and the same; there is separation. Who knows? Maybe the government will end up with a better ROI than would some of the private ventures. Usually governments are not as good investors as the private sector due to politilisation, bureaucracy and a general lack of direct knowledge of the specific conditions in industry but it is still possible, in theory, for the stimulus to return positive.

vibe said...

I agree that the government could make its money back, say for example through tolls on a new bridge. But that means that the people using the bridge are paying for it.

My reading of Jim's comments (which I'm sure he will politely correct if it is wrong) is that improvements to the economy created by building the bridge would pay for the bridge through increased tax revenue. That doesn't quite add up to me.

JimTan said...

“My reading of Jim's comments (which I'm sure he will politely correct if it is wrong) is that improvements to the economy created by building the bridge would pay for the bridge through increased tax revenue. That doesn't quite add up to me.”

Ahhhh! The pain!

Let's use the bridge example. The government builds a new bridge. It spends $100m on labor and materials. The workmen hired for the project gets $30/hr. That's new income. They spend the money on power tools, BBQ sets etc. The makers of power tools increase production to meet demand. Their workers buy things. And so on.

People buy on credit, if they are optimistic enough about the future. They believe that their future income will pay for current expenditure on durable goods. So, the economy expands by more than $100m.

At each stage, the government earns sales and income taxes. The government may recover $20m in the first round. It will recover more with each subsequent round of spending.

The government's 'investment' may be very 'profitable' if it can inspire enough people to spend rather than save. For example, we have just had a very bad experience. People are afraid and may try to save more than normal. Banks are afraid to lend.

This has a negative spiral effect. Contraction leads to more contraction. Government revenues may keep shrinking for a long time if it does nothing.

From a short term POV, the government stimulus is 'profitable' if it generates a positive cash flow. The government needs to borrow $100m to pay for the bridge. But, it only needs to pay 2% per year in interest. We know that it will recover at least $20m (20% in the first round).

Of course, it would cost almost nothing if you printed money to pay for the stimulus. That's something you might want to do if (like now) capacity utilization is far below normal.

Don't forget that there is a social cost if you allow people to be idle for a long while as the economy slowly improves by itself.

How does the government pay for the principle $100m? Proper fiscal management says that you should run a deficit during a recession and a budget surplus during the good years. It is merely a shift in the time you spend the money. You built/rebuilt the bridge earlier than you would have.

vibe said...

Jim, maybe you could save yourself some pain if you stop assuming that everyone else is an idiot.

People buy on credit, if they are optimistic enough about the future.

Credit is maxed out, the country is already over leveraged. Should the government really want people to get into more debt? Should the people care what the government wants? I’m saving my money.

So, the economy expands by more than $100m.

What if the banks just put the money in their vaults? Is credit currently expanding or contracting in Canada? I really don’t know the answer to that but I would guess contracting, or it will be shortly.

Government revenues may keep shrinking for a long time if it does nothing.

Or if it does something. Or not.

But, it only needs to pay 2% per year in interest.

Not for long.

Of course, it would cost almost nothing if you printed money to pay for the stimulus.

Inflation is a real cost to anyone who holds $CDN. That would be every saver in Canada for starters.

Don't forget that there is a social cost if you allow people to be idle for a long while as the economy slowly improves by itself.

This could be mitigated with social welfare programs paid for with money saved on not bailing out corporations and subsidising house renovations. But that’s kind of a philosophical debate.

Proper fiscal management says that you should run a deficit during a recession and a budget surplus during the good years. It is merely a shift in the time you spend the money. You built/rebuilt the bridge earlier than you would have.

I agree 100%. Use savings rather than debt and only spend on things that you need anyway. Just don’t tell me that the government going into debt to offset private sector job loss indicates that the economy has recovered. And don’t forget money doesn’t grow on trees.

RentingSucks said...

Found this blog why looking for the source of the"Typical Bubble Lifecycle" graph. Was intrigued that it had a double top and when juxtaposed with the Vancouver housing price graph they fit quite well (see Real Estate Talks). So anyway on this blog page he graphs 3 bubbles: Technology, US Housing and the recent Commodity bubble (oil and food). All of these have a double top and 2 out of 3 of the the second top is higher. Besides that there are a bunch of extremely insightful posts. Fascinating stuff.

http://tinyurl.com/yk6fxq4

Dave said...

RentingSucks said...
"Was intrigued that it had a double top and when juxtaposed with the Vancouver housing price graph they fit quite well (see Real Estate Talks)."

Of course, just having parts of the graphs match doesn't indicate that Vancouver will follow the same trend for the rest of the graph.

I do think that Vancouver has a housing bubble in the sense that the cost of condos are far above their construction costs (I mention condos rather than houses as land costs are not the major factor). However, at this point, with little new construction planned, it seems likely that a rise in interest rates is needed to prick the bubble. But interest rate futures show little indication of a rise over the next few years. Unfortunately, it seems the bubble may continue to expand for some time.

RentingSucks said...

I think it's a bubble from the Median Income/Median House ratio. From the above graphs and data if we agree that the Vancouver market is in a bubble then a double top is fairly typical. I've been thinking about why this is. I have 2 thoughts right now:

1) Something about human behaviour where a small drop causes us to turn on the afterburners for one last hurrah.
2) The powers that be always try to maintain bubbles because they are the new normal.

Interestingly if you read the economist's blog from above he talks about lax credit and the end of a bubble and he isn't talking just about housing bubbles.

So anyway the general conclusion from all of this is that a double top is normal and no indication that we are not in a bubble but perhaps a strong indicator that we really are. Frankly I was quite concerned about the resurgence of house prices but now it looks like it is a typical behaviour.

I highly recommend you browse the guys posts from above they are all very interesting.

vibe said...
This comment has been removed by the author.