“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.”
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.