Let us take a trip over the Atlantic to Canada where we see that a familiar issue is bubbling up again.
Bank of Canada Governor Tiff Macklem said he’s seeing “worrying” signs in Canada’s hot housing market, in which households are taking on increasing levels of debt to chase rising prices. ( Financial Post)
Perhaps the housing market is soaring because someone has done this?
The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week. ( March 10)
You could quite easily read the next bit as Governor Macklem saying to house buyers that he has their back. He has set policy to make borrowing as cheap and he can and also he has done his best to keep the quantity of credit flowing.
In the Bank’s January projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway. As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.
We can look into this further because the Bank of Canada calculates a variable mortgage interest-rate. This came into the pandemic at 2.9% and now is at a record low of 1.42%. I raise this because the interview seems to have somehow missed it.
These seem to have shot up for no reason at all.
The central bank had largely stayed quiet on the housing market until February, when Macklem said it was showing signs of “excessive exuberance” as national real estate prices jumped 25 per cent from the year before.
That is still continuing.
“Since then, the housing market has continued to run strong across a variety of dimensions; price increases have continued at a pretty high rate,” Macklem said in an interview with the Financial Post on Wednesday.
Indeed he is allowed to get away with a blame game
While the state of the market can be explained to some extent by a fundamental shift in demands, there are other factors, like speculation, at play, the governor said.
Considering his own behaviour and actions the bit below is breath-taking.
“What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in. There certainly are some signs of extrapolative expectations,” Macklem said.
“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”
So people just turned up and started speculating all of their own accord in a pandemic?
Apparently according to Governor Macklem the fact that people are borrowing seems to be like the economic equivalent of an out of body experience.
“If you look at the household indebtedness, you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured space. That suggests that Canadians are stretching and that is worrying.”
If we take a look we can see a driving force here and the good Governor only needs to look at his own website. It calculates an effective household interest-rate which includes mortgages but also other borrowing. It has dropped from 3.7% to 2.57%. I suggest the Governor needs to launch an immediate investigation into who has done this?
If we look for the debt data we see a sign that they have been listening to Lyndsey Buckingham.
I think I’m in trouble,
I think I’m in trouble.
They have switched from the Bank of Canada to Canada Statistics so we can see that as of last September residential mortgage borrowing was growing at an annual rate of 5.7%. From September to January it grew from Canadian $ 1.61 trillion to $1.66 trillion or about 2.7%.
Here is the view of Canada Statistics.
By the end of January, households had added $7.0 billion in overall mortgage debt compared with the end of 2020—a year-over-year rise of 7.1%. Sales of existing homes remained strong into January, with overall sales volumes up 35.2% from the previous year. Non-mortgage debt declined 1.6% by the end of January, compared with the same month of the previous year, and has yet to reach the levels of 2019, after a year of moderation, including a notable decline in the first half of 2020.
Overall, the total credit liabilities of households reached $2,453.2 billion by the end of January. Real estate secured debt, composed of both mortgage debt and home equity lines of credit, stood at $1,925.7 billion.
Early last month the New York Times took a look.
Instead, of course, Canada is talking again about whether most of the country is in a soon-to-burst real estate bubble. In Vancouver last month, the benchmark price for detached homes rose by 13.7 percent compared with a year earlier, reaching 1.6 million Canadian dollars. In the Toronto area, the average selling price for detached homes rose by 23.1 percent over the same time period, and a composite price that includes all kinds of housing topped 1 million dollars.
This was put another way by CBC yesterday.
In December, the Canadian Real Estate Association warned that the average house price in Canada is expected to hit $620,000 throughout 2021. By this month, the CREA reported that home sales in February were up 39.2 per cent compared with a year ago, and the average price had hit $678,091, up 25 per cent from a year earlier.
This is part of what has become familiar for central bankers but Governor Macklem has taken it to something of an extreme. In some ways I am a little surprised that he did not try to claim “Wealth Effects” from the house price rises. If we step back for a moment he was responding to this from a Bank of Canada survey.
In particular, focus group participants voiced concerns about the costs of urban housing:
- rising far beyond the 2 percent inflation target
- growing faster than wages
These growing costs, they said, make it much harder for people to become homeowners. As a result, they felt this widens the divide between the rich and the poor, which negatively affects social cohesion.
This was right at the top of the survey. He is in something of a trap because he has promised to continue easy monetary policy until 2023. The Bank of Canada has recently stopped some of its emergency programmes but if we return to the Financial Post raising interest-rates is considered like this.
Tal reiterated Macklem’s view.
“The housing market is one part of the economy,” he said. “As a society, we have never been so sensitive to the risk of higher interest rates…. Every small increase in the interest rate can have a significant impact on the housing market and therefore, (Macklem) would like to see the market slow down before we have to raise interest rates.”
It did not seem to bother him when he cut interest-rates!
Also let me add in an additional factor here which comes to some extent from fiscal policy and the furlough schemes.
Canadians recorded a similar amount of savings in 2020 as in the previous seven years combined. Some of this savings made its way into currency and deposits of Canadian households, with growth in this asset nearing $160.0 billion over the first three quarters of the year. The savings rate for the fourth quarter stood at 12.7%, while the savings rate for 2020 was 15.1%. ( Canada Statistics)
Perhaps some of these savings are finding their way into the housing market as well.
Let me finish by wishing you all a Happy Easter.