Ignoring The Effects Of A Topping Bubble – “Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

“The market for home sales is chilling further after months of decline – and it’s putting Finance Minister Jim Flaherty on the hot seat. New data show sales deteriorating in November, and the association that represents Canadian realtors says sales will fall, not rise, this year and next. Mr. Flaherty, who sought to cool the market this summer by tightening mortgage insurance rules, says his actions are only one part of the story and that Canadians are voluntarily curbing their appetites for mortgage debt.” …
“Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity,” CREA chief economist Gregory Klump stated in a press release.

– from ‘Realtors blame Flaherty as slump deepens’, Globe and Mail, 17 Dec 2012 [hat-tip allen]

A speculative mania eventually implodes under its own weight. It doesn’t need rising interest rates or a failing economy to bring about its demise. In fact, its deflation is more likely to bring on an economic slump than to be caused by it. In Vancouver, the market started slowing before the mortgage changes came into effect.
The erroneous argument put forward by the economist above has already been ‘collected’ in our ‘Erroneous Theories For Falling Prices’ category.
– vreaa

19 responses to “Ignoring The Effects Of A Topping Bubble – “Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

  1. Real Estate Tsunami

    Instead of blaming Ottawa for the slowdown in Re activity, the Realtors should thank Flaherty to bring some consistency and stability to the RE Market .
    I think we have a better playing field now.
    But then again, we can’t be sure how the offshore Germans will participate in the spring market.

    • They are blaming Flaherty because he’s the only guy capable of reversing recent credit crimps. They know all too well availability of credit is key for their members’ incomes.

      This is but a single shell in what will be a constant salvo of complaints and criticisms strategically designed to make the politics difficult for the CPC in the years ahead, should they stay the course on credit availability. There are very few mobilized and organized groups lobbying on the other side, save maybe the faceless ‘bond vigilantes’. I guess we’ll find out how scary the monster is that Flaherty thinks is hiding under his bed ;)

    • Flaherty has no clue what he’s doing and is by far too late. Watch what happens after spring when pre-market buyers throw in the towel and opt in to default.

      • I think he does know exactly what he’s doing. They ponied up in 2008 to bounce the economy out of a sharp recession. Not a bad idea, but they used moral hazard to get the private sector to act. Countries around the world did the same thing.

        The beast now demands ever greater government guarantees for risky lending. They burned through $500 billion of CMHC insurance in five years, and got news articles all around the world about Canada’s housing bubble. Nobody in their right mind would throw another log on that fire.

        Flaherty has already said they will use government stimulus and policy to counter the next recession. There’s nothing surprising or atypical about that. I bet they will even use the CMHC again, but I doubt they will do it when house values are widely perceived to be inflated.

  2. Real Estate Tsunami

    This may be a little off topic, but I found out that the Richmond Developers were wining and dining Richmond City brass last Friday.
    Only the best booze and culinary treats were good enough, to ensure another year of rubber stamping developments.

    • Not off topic at all. In fact, I’m going to headline that story. A central thread to the whole spec mania has been the confluence of the interests of all the different parties who benefited from prices running up.

    • Good. Pull out the rubber stamp! Bring on the supply!

  3. UBCghettodweller

    Again, “experts” mistaking catalysts for reactants… But the great thing is that economics is a continual experiment. I wonder if they’ll say the same thing as the data piles up. There are always second, or third, or fourth, chances to make a better conclusion.

  4. CREA to Flaherty on the state of the real estate market:

  5. Klump’s got things backwards. Low rates have enabled reckless borrowing and speculation which, in turn, will lead to housing’s collapse. And it is housing that is supporting the economy, not the other way around.

  6. And now the Ancouver Sun risks losing its RE industry sponsors: http://www.vancouversun.com/business/Bumpier+landing+seen+Vancouver+real+estate/7713563/story.html

    It’s getting crowded at the exits.

    • One thing we can hopefully all agree on where newspapers and the other media are concerned….the News is NOT forward looking. Its purpose is really only to reflect what has already taken place. I don’t go there for projections of the future and so it is no surprise when they acknowledge what we already knew about more than two years back.

  7. I have to disagree with Mr. Klump, who in turn (I think) feels that the changes made by Jim Flaherty weren’t required. Klump’s wrong. Keeping interest rates low for those already in the market makes it easier to hold, meaning less downward pressure on price than we could see. At the same time, making mortgages harder to get for new entrants/highly leveraged buyers removes some demand. Given our high prices and remembering the effects of the housing crash in the US I think we’ve got as good a move as we could expect from the Finance Minister. Considering the alternative…

    • Much of this website calls out bullshit on false claims and poor predictions with maybe a little bit of kicking the BPOE culture around.

      I’m not sure I’ve read anywhere what the finance minister could do better _now_. Yes there’s consecutive screw-ups in the past with little foresight if not drunken negligence. But at this point in time, could he do anything better?

    • If Flaherty holds steady now and lets the market play out, fine.
      If prices start dropping and he tries to fuel the fire again with looser lending, longer amortizations, etc, we’d be critical.

      Off topic -> Hey Rob, is that Townes Van Zandt in your gravatar??

  8. vreaa – never saw that compliment coming :-)

  9. Then by the same logic, Flaherty’s tightening of mortgage rules must be responsible for the increase in Calgary RE sales and prices this year. Seems to me that a real estate economist is one that never actually passed a microeconomics course.

  10. Any update regarding this matter? Since it’s already 2013 and many months passed by.

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