Growing concern of Canada`s housing bubble

There are increasing concerns that a housing bubble is being created in Canada, though government officials denies that any problems exists. As I haven’t done much reasearch on the issue, I don’t know enough about the Canadian housing market to say whether or not there is a bubble (A sharp increase in the current account deficit and high money supply growth does however suggest the Canadian economy is on an unsound path), but the mere fact that government officials deny it isn’t really a convincing argument against it, given the denials by Bush administration and Fed officials in 2004-06 that any problems existed in the U.S. housing market.

Canada isn’t the only country where housing bubbles may be on the rise of course. Sweden and Australia and probably many other countries also have housing markets that are becoming more bubble-like.

I see at Barry Ritholtz’ blog a link with information that clearly supports the view that Canada is in a housing bubble:

„Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period….

….The 2009 price increase of more than 20% came as personal income in Canada fell nearly 1% and total employment was 1.4% lower than the year earlier. In a December report, the Bank of Canada warned that household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high….

….Another possible danger: Because Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see increases soon. Toronto-Dominion Bank forecasts suggest that the rate to which many Canadian mortgages are pegged, the prime rate, could nearly double by the end of 2011. The Bank of Canada warned in its December report that if interest rates increase as expected, by mid-2012 about 9% of Canadian households could have so much debt that they’d be „financially vulnerable….

…In October 2008, the Bank of Canada made the first of a series of rate cuts that eventually lowered the target for its key overnight lending rate to 0.25%, which in turn reduced banks’ prime rate—the basis for calculating variable-mortgage rates in Canada—to 2.25% by April 2009. In Canada, nearly all mortgages have rates that adjust at least every few years. Currently, rates on some loans have fallen to 2% or lower…..

…But Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: „If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.””

Add to that the facts that I mentioned in the previous post about very rapid money supply growth (nearly 20%) and a very rapid increase in Canada’s current account deficit, and there can be little doubt that Canada has entered a housing bubble driven by the inflationary policies of the Bank of Canada.

As a sidenote, I do find the comments by Barry Ritholtz in his post to be somewhat confused. First he links to evidence that Canada is in fact experiencing a housing bubble, but then he proceeds to assume that Canada is insulated from housing bubbles, based on a speech by some Fed official (A speech which not surprisingly was nonsensical as I demonstrated here), as if remarks by Fed officials was more important than the actual facts.

A Canadian reader offers the following analysis of the current „Conservative” Canadian government:

„Stefan,

Our Conservative Prime Minister Stephen Harper is an economist by profession and training, and a real fiscal conservative by inclination. During the Sept.-Oct. 2008 general election campaign, he said:

„I think if we don’t panic here, we stick on course, we keep taking additional actions, make sure everything we do is affordable, we will emerge from this as strong as ever. We are not going to get into a situation like we have in the United States where we’re panicking and enunciating a different plan every single day.”

The PM was widely criticized by the opposition parties and the media for the „don’t panic” comments. They said that the Government wasn’t doing anything about the economy, the tacit Keynesian assumption being that you have to do something. The Conservatives were re-elected but didn’t get the majority in Parliament that they wanted.

Shortly after the election, the Government’s policies changed. Since „don’t panic” didn’t poll well, they decided to go in big with „stimulus”. We are now bombarded with ads telling us about the federal government’s stimulus programs. The result is a projected budget deficit of C$55.9 billion. That’s about 4.7% of GDP. So that and the easy credit conditions are the source of the increase of the money supply that you highlighted in your blog.

I think that the Conservatives hope that this „being seen to be doing something” strategy will deliver them a majority government in the general election expected this year. Then, the conventional wisdom is, they can govern conservatively. I believe that the PM knows what he is doing is bad economics, but his political advisors are probably telling him that he can’t win a majority in an election if he appears to be doing nothing. Canadians are very conditioned into expecting the government to solve their problems. Then, too, we have a barrage of President Obama rhetoric about fiscal stimulus bombarding us from across the border with the U.S.”