Tuesday, June 14, 2011

When Atlas Shrugs

It is rare that I listen more closely to people more than I do to central bankers and their entourage of economists, one because their words are clouded in nuance, two because their words are few and strategically meted. It so happens that Mark Carney will be giving a speech to the Vancouver Board of Trade tomorrow (Wednesday June 15 2011), apparently on Canada's housing market. Coincidence Carney is speaking in Vancouver about the housing market? You decide!

Carney's speeches are important because they have provided substantive hints at future directions of government policy, not only overnight lending rates on which his bank has direct influence but also on auxiliary government policies that affect economic growth in the medium term. One such area of concern recently highlighted by Carney has been the over-valuation of assets and elevated debt levels propagated by low interest rates, speculative bubbles, and international capital flows in Canada's housing market.

I will be eagerly awaiting the speech as I see it as providing key clues surrounding policy options for the federal, provincial, and municipal governments to quench speculative excesses in the housing market, at a time when interest rates are unusually accommodative. The speech is concurrent with ongoing OSFI investigations into banks' exposure to potential asset price bubbles (of which I touched on here). While this is a housing analysis blog and undoubtedly biased towards all things "housing", it should be made eminently clear that, in my view, an unstable housing bubble is the key risk in Canada's economic growth in the medium term and in the interests of all Canadians to ensure such a bubble is mitigated as efficiently and quickly as possible.

I will provide my thoughts on Carney's speech after it is distributed.

edit: it is rare that the Bank of Canada and Department of Finance diverge from bringing a common message. Here is the latest press release from the Department of Finance:
Among the important measures included in the Act are those to: ...
Reinforce the stability of Canada’s housing finance system
  • Strengthening the Government’s oversight of the mortgage insurance industry.
If it were me I would regiment that all low ratio loans be qualified at the 5 year posted rate, and that mortgage insurance be capped in markets where prices have deviated from incomes. My concern is that, like certain Asian economies, over-indebtedness is not necessarily limited to high-ratio loans, and current low-ratio loans may end up being tomorrow's high-ratio loans. Strengthening oversight may have to be extended beyond CMHC. We shall see!


mohican said...

Mr Carney does nothing without a clearly calculated strategy of an end game. His communication tomorrow will be nuanced but pointed to be sure.

I think he is frustrated in his attempts to cool the hot, speculative housing markets in VCR and TOR. He lacks the tools to deal specifically with these problems. As he knows, the bubble will undoubtedly collapse under its own weight at some point and Mr Carney wants to be on record as warning against the obvious excesses associated with the bubble.

Valuations come and go, but the debt lingers on and on.

jesse said...

"debt lingers on and on."

Who have I heard that from before...