Just a few days after the OECD warned of the risk of a "disorderly housing market correction" in Canada, moments ago the Bank of Canada also chimed in and warned that the "potential" for home price downturn in some areas has increased, and that Vancouver, Toronto home price gains likely unsustainable. Which is curious because the vast majority of price gains in Toronto and Vancouver have been driven by the outflow of the trillion in Chinese inert deposits, which promptly find their way into Canadian real estate (and lately bitcoin). In other words, is the BOC assuming that China will crash soon?
We doubt they thought that far ahead, and instead this is merely banker support for what Canada Prime Minister Justin Trudeau said yesterday when he called high housing prices a “real drag” on Canada’s economy in an interview with Business News Network. “Rising home prices, uncertainty around being able to buy your first home or upgrade as you want to grow your family is a real drag on our economy,” Trudeau is quoted as saying.
Odd: one would think that like any other Keynesian nirvana, a housing bubble is a boost to Canada's economy. Or maybe this is the "socialist" loophole? Meanwhile, this is what is going on in Canada:
In addition, the Bank of Canada highlighted increasing household vulnerabilities in the June release of their Financial System Review, and indicated that the overall risks to financial stability are largely unchanged since December.
- BoC: Economic fundamentals unlikely to justify continued strong price increases in Vancouver and Toronto markets "Prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction."
- Bank of Canada continues to highlight elevated levels of household indebtedness and imbalances in some regional housing markets as vulnerabilities
- Bank: about 15% of insured mortgages originated in 2015 had a loan to income ratio exceeding 450% compared with 12% in 2014
- BoC: "There is evidence of increased riskiness in the characteristics of recent mortgage originations"
- BoC: Divergent performance of housing markets in Canada is more pronounced
- Bank: "Potential for a downturn in house prices has increased in some areas"
- BoC: Fragility of fixed-income market liquidity identified as vulnerability
- BoC: Most important risk is a severe recession causing increased unemployment, impaired debt-service, and broad-based corrections to housing prices;
- Probability of risk low as economy grows, US economy expands, monetary and fiscal policy stimulus remain accommodative
- Other risks identified include sharply increasing interest rates, stress from China and emerging markets, and prolonged weakness in commodity prices
- BoC: Financing conditions in Canada remain stimulative
- Bank of Canada: Financial losses from the Alberta wildfires will be large, but won’t affect banks significantly