Don’t Worry, I’m Sure Somebody Will Sort This All Out – “Policymakers now know better and will be a lot more proactive in preventing a collapse.”

“Risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes. Many housing bears assume this overvaluation entails a hard landing but I’m not convinced it’s inevitable at the national level. One reason – which seems mostly overlooked in the debate – is that Canadian policymakers will be doing their utmost to avert such an outcome.

In a sense, Canada is fortunate to be facing the spectre of a housing bust after other countries have had theirs. Before 2008, it was generally believed house prices could never fall by much. Policymakers now know better and will be a lot more proactive in preventing a collapse.

Canadian policymakers do have the levers to affect outcomes. One is the regulatory framework for housing, which can be amended in various ways to reconfigure housing demand and supply to the extent required. Indeed, Finance Minister Jim Flaherty has tightened mortgage lending several times over the past two years to slow down price increases and give household incomes time to catch up.

Other regulatory changes include tagging Canadian banks with “too big to fail” provisions that require them to put aside more capital. Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity.

In addition to these pre-emptive steps, Canadian policymakers have no doubt given some thought to dealing with the risk that the soft landing could go off the rails. It’s hard to imagine they would allow the housing sector to destabilize the economy and financial system like it did in the U.S. and other countries.

Responses could range from cutting the Bank of Canada rate to relaxing regulatory restrictions on housing demand. Housing bears might complain about such measures but they would allow Canada to reposition back to a soft landing. That would be more preferable than inflicting the trauma that befell the countries hit with housing meltdowns.”

- from ‘Canada’s lucky to come late to the housing-crash party’, Larry MacDonald [a "retired economist"], G&M, 13 Jun 2013

A soft landing will not be engineered in the Vancouver RE market;
it is in the nature of spec bubbles that they burst, ending with a “bang and not a whimper”. Let’s hope that those in charge of Canada’s monetary policy and mortgage rates don’t do even more damage to sensible citizens by trying to avert the inevitable.
While we’re on the topic of “late to the party”, it is interesting to see the Globe and Mail’s Larry MacDonald, who up to now has gone to great lengths to reassure himself and everybody else that the RE market is not at risk [see, for instance, 'Housing bears need to relax and take the long view', G&M 1 April 2013], now stating that “risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes.” After all, prices have been outrageously high relative to incomes for many years now.
- vreaa

22 responses to “Don’t Worry, I’m Sure Somebody Will Sort This All Out – “Policymakers now know better and will be a lot more proactive in preventing a collapse.”

  1. Yep. I’ve said it before, ‘n I’ll say it again… policy makers can ‘do stuff’… but ‘doing stuff’ won’t necessarily lead to the desired outcome.

    A timely parable…

    “If I was misleading them, then that was for a reason, because I didn’t want them to get as upset as I felt… I just couldn’t believe what was happening, and yet I was chatting to the passengers, saying: “Nothing to worry about. It’s just a little hiccup.” – BA Flight 009 Chief Steward Skinner

    [UK DailyMail] – The story of BA flight 009 and the words every passenger dreads…

    http://tinyurl.com/ap54d3

    [NoteToEd: On the BrighterSide, the Captain and First Officer's interventions did, ultimately, allow everyone to FlyTheFriendlySkies once again... but their 747 was toast, so to speak.]

    • “Oooops.”

      [CBC] – B.C. due for mega-earthquake along coast: B.C. coast ‘in the risk zone’ for a major earthquake

      http://tinyurl.com/ll2gp56

      [NoteToEd: No 'SoftLandings' in Richmond it seems. On the BrighterSide though, former Premier Billy "Get A Shovel" VanderZalm could always resurrect his BiblicalThemePark as "FantasyAtlantis".]

  2. Cyril Tourneur

    I don’t think Larry has a very good grasp of the consequences and problems associated with market interference.

  3. Ralph Cramdown

    Where does Larry get this theory that US policymakers didn’t do everything possible to reinflate their housing bubble? First time homebuyer grants, facilitating the shotgun marriages of failed mortgage lenders with more senior institutions, emergency interest rates, nationalization of Fannie and Freddie, opening the discount window to non-banks, buying MBS… I could go on.

    And Canadian policymakers can reconfigure housing demand? Really? It’s easy to slow demand if you think it’s too high, but it’s awfully hard to goose it if you think it’s too low, but demographics, household formation, debt levels, lenders and cash flow investors don’t agree.

  4. THe Chinese have moved on to the US. San Francisco’s median price shot up from 800K to 1 mill since November to now. (Average price, which Canadian realtors love to use to dupe the public is about 1.6 mil.)

  5. Dimitri Tishchenko

    Larry suffers from an over inflated sense of trust in the competence of the government. Statements like “surely they won’t crash the market” and “considerable thought has gone into” give him away. They were incompetent in creating the bubble and they will be incompetent when dealing with it.

    Larry sounds like a member of the 70%. “The government has MY interest at heart”.

  6. The article is correct but it lacks calibration.

    A reminder that there were “policymakers” in all of those other countries too — madly grabbing at every lever and button (and injecting cash and changing regulations) to prevent or reduce the impact of their crashes. These economies were not on autopilot.

    What the author fails to grasp is that the apocalyptic outcome that we saw in country after country around the world *was* their soft landing and *is* our policymakers’ target. The Canadian regulators will not be able to do much better than what the American ones achieved, but are at great risk of doing much worse.

    Housing prices falling by 75% in some places, banks failing, millions out of work, and multi-year recession *is* the result of successful bubble mitigation by regulators.

    Such an outcome can be considered successful because it means that the regulators have succeeded in preventing a Japan-style 30-year descent towards 3rd world status, a Greek-style interruption of civilization, and (and this was actually a likely outcome for several weeks in 2009) the successive collapse of most of the worlds’ economies and literal return to the dark ages.

    That is how the scale is calibrated, good sir.

    If Canada is lucky, (yes we are,) smarter than the rest, (no we are not,) and wealthy and flush with liquid assets, (no we are not,) it will engineer a “soft landing” that’s a little less “soft” than the one that America enjoyed but keeps us from becoming the next Japan.

  7. I think Larry is jumping to a huge conclusion when deciding “Canadian policymakers will be doing their utmost to avert such an outcome”. There is no evidence of that being the objective of policymakers. The (re)tightening of CMHC regulations seems more like an ‘after the horse has bolted’ attempt to reign in the gigantic liability the CMHC has taken on as well as a way of slowing Canadian’s appetite for debt during this time of exceptionally low interest rates.

    There is nothing to suggest policymaker’s would find a fall in housing prices to be a bad thing. In fact, given the disparity between incomes and house prices, the ever increasing debt load of Canadians, and the long term economic consequences of this RE Ponzi scheme a smart government would be looking to pop the bubble.

    I wonder how much Larry gets from the RE industry for peddling this propaganda?

  8. So, to summarize: It’s inconceivable! It can’t, it won’t, they wouldn’t! Not after having seen it the last time! There’s just no way!

    Best part of this argument is that the only reason the entire global economy blew up was because no had any idea housing markets were capable of dropping? What a laughable presumption. This article really reads like the rationalizations of a desperate man, you’d expect it would be clearly seen as such by its editors and audience but clearly the media buying public is all too hungry for any palliative narrative.

    • When I open the article I see no fewer than three BMO bank ads on the page.

      If I click to read the comments, I am taken to a new page which shows me 3 more BMO ads.

      So BMO have paid the G&M for up to 6 impressions per reader who comes to read their article about housing being fine, the economy being fine, the banks being fine, and how even though nobody knows what will happen, and all the stats are terrifying, it will be fine thanks to unspecified intervention by powerful men in dark suits.

      (Of course if you read the comments you will see 30 negative and 1-2 positive. Meaning that most readers are probably just there to gawk at the flagrancy of MacDonald’s abuse of his position.)

      Amazing how in just a few years, the important-and-dignified-and-respected-for-centuries occupation of Professional Journalist can be converted into the equivalent of a poorly-paid propagandist and ideas prostitute.

  9. Randy Randerson

    Maybe it was an elaborate April Fools joke. It was published on April 1st.

  10. Meanwhile, in other news….

    “Asking price plunges for Len Barrie’s former home on Bear Mountain”

    http://www.timescolonist.com/asking-price-plunges-for-len-barrie-s-former-home-on-bear-mountain-1.320088

    “The luxury mansion built for Bear Mountain developer Len Barrie is back on the market at less than half of last year’s asking price.

    Showcased last year as the glamorous setting for the Bachelor Canada television show, the 12,500-square-foot home at 2300 Compass Pointe Pl. in Langford is now listed at $4.988 million, down from $9.999 million in January 2012. The house had previously been priced at $13.9 million…”

    But not to worry…..cuz: “It just needed a break. The market was quite soft at that point,” said Scott Piercy, who has the listing with Jim LeBlanc at Sotheby’s International Realty Canada. Last year, the house was leased for the television show and some upgrading was carried out as well, Piercy said.

    The new price is in line with the current market, he said. “We are seeing a good resurgence of buyers in the multimillion-dollar level.”

    Okay…..and Super-Prudent HSBC holds a mortgage on the place for how much….?

    “….Barrie, a former professional hockey player, was forced by court order to hand over the house keys to HSBC Bank Canada in January 2012. HSBC held mortgages on the house totalling more than $14 million, court documents state….”

    The place is assessed at $4.49 million. Ouch!

  11. metric system coming to MSM

    telling Margaret Atwood back in 1968 to ‘relax’, just pissed her off even more.

  12. ed, spelling? “… Globe and Mail’s Larry MacDonald, who up to [now] has gone to great ..”

    Also, it seems to imply the opposite as well. Assuming governments have the ability to “lower demand” and prices “softly”, wouldn’t that also mean that they had the ability to raise them?

    So either it’s a free market or it isn’t. You can’t have a free market on the way up and a control market on the way down.

  13. “I apologise for occupying your space. But since there are people who deem it creditable if one does not change one’s mind, I should like to get what kudos I can from not having done so on this occasion!”
    - Keynes

  14. Oh, Larry at it again. Yes, very funny that with basically no change in prices things have gone from oh-so-rosey to undeniably risky.

    Of course, for policy makers to avoid a collapse they should have stopped the run-up to begin with (or prevented it from getting worse with the lower rates 2009-present); there’s a lot less that can be done from this point.

  15. More from Larry in Canadian Business Magazine:

    “Why rising mortgage rates won’t tank the housing market”

    http://www.canadianbusiness.com/economy/why-rising-mortgage-rates-wont-tank-the-housing-market/

  16. “Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity”

    Other “liabilities” meaning our personal bank accounts. Government already said so in the budget plan submitted back in March. Oh but “That’s in Cyprus, that would never happen here!”, right?

  17. “Canadian policymakers will be doing their utmost to avert such an outcome.”

    They already did, in 2009. That got us into the current mess, which is much worse. Is he suggesting they can drive prices higher before they ultimately correct? I suppose so, seeing as how they already did that. Bankrupt everyone, I don’t care. I’m not paying.

    “Finance Minister Jim Flaherty has tightened mortgage lending several times over the past two years to slow down price increases and give household incomes time to catch up.”

    And it hasn’t worked. Prices either go up unsustainably or they go down to a natural level. Maybe if the government wasn’t shovelling credit out the back door we would have a normal market, but I guess that’s a “policy decision” to bankrupt young families and wreck the system generally. It sounds very profitable.

    “Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity.”

    So you’ll steal peoples’ bank deposits and impose capital controls? Enjoy the third world country that you’re building. You’ve already got the price of shelter to income at the levels of a slum. Keep building that slum.

    “It’s hard to imagine they would allow the housing sector to destabilize the economy and financial system like it did in the U.S. and other countries.”

    As I recall, it was all under control in those countries until people started “losing money”. So yeah, whenever it ends it will be a total shitshow but I’m sure they can keep it going for a while yet. It helps the wealthy get their money out.

    “Responses could range from cutting the Bank of Canada rate to relaxing regulatory restrictions on housing demand. Housing bears might complain about such measures but they would allow Canada to reposition back to a soft landing. That would be more preferable than inflicting the trauma that befell the countries hit with housing meltdowns.”

    We’ve already taken those measures and the bears did complain, because we didn’t actually improve the situation, we made it all worse. But I’m sure that NOW, when there are hardly any options left because we’ve handed out zero-down interest only loans, given tax rebates with borrowed money, etc, somehow it will all work out.

    Good night and good luck Canada. I know you’re just going to try to steal all my savings anyways, or somehow try to control how I spend it. I figure it won’t even be close to enough. Have fun with your stupid fucked up non-market system where nothing adds up and personal wealth is a “policy decision”. It’s a joke, and I won’t be investing in it.

    The only redeeming thing you can have is fair market prices, largely not under the influence of government. This allows for rational investment decisions, which creates a productive economy. It’s a simple choice with big consequences, and it would have been much better had this principle not been trampled upon by a so-called “Conservative” government for what is now seven years.

    The markets will eventually force a reckoning, and it will be vicious. Politicians and society, with no way to fix it, will ignore their culpability and rank hypocrisy and blame the victims. They did so in the US and their bubble was shorter.

    My biggest concern is that in the process of fighting over fake wealth and entitlements that can’t be paid for, the Canadian social pact will be dismantled. Many of you voted for it and cheered it on, and faced with big losses or disgusted by the whole thing, you’ll do it. It is very profitable to plunder a whole society, and that is what is going on.

  18. “Bailing-in” is not stealing people’s bank balances. Banks lend out the money you deposit with them. If banks lend poorly, they lose the deposits they lent out. When a bank is in trouble, there are no bank balances to steal, they have already been lost via loans or other investments that will never be repaid.

    Now, in the recent crisis, depositors were not “bailed-in” because the government “printed” money and gave it to the banks to replace the deposits they lost. So, when a bank fails, either depositors suffer by being bailed-in, or the taxpayer suffers by replacing the money that the banks lost.

    Now, it seemed we had a good compromise. CDIC would bail-out the little guys with small deposits, while allowing sophisticated investors with large balances to be “bailed-in”. However, in practice, governments have been bailing out all depositors, whether they were covered by insurance or not, which was not the plan. Governments can afford to bail-out the little guys and should, but Government can only afford it if they allow the big guys to be “bailed-in”.

  19. Any attempts of the government “fixing the market” lead to unintended consequences that in the long run could cost more than letting the market to do its thing – to correct itself. One of the sad side effects is a brain drain/young people leaving in droves:
    “We’d love single-family life” – Richmond News June 7, 2013
    http://www.richmond-news.com/life/love+single+family+life/8492923/story.html

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