Bank of Canada – “Price corrections in the housing market and the risk of mutually reinforcing declines”


Prayer may be advisable

“The high indebtedness of the household sector and elevated valuations in the housing market require continued vigilance.”

“The contagion effects on global financial conditions could be significant. … These conditions make households especially vulnerable to adverse shock … high household debt levels continue to be the most important domestic risk to financial stability in Canada.”

“Households need to be cognizant of the fact that borrowing rates will eventually normalize and ensure that they will be able to service new and existing debt over the duration of their loans.”

“Housing assets have become increasingly important for the net worth of Canadian households, currently accounting for about 40 per cent of their total assets, up from 34 per cent 10 years ago.”

“Price corrections in important segments of the housing market can have adverse effects on the financial system through contagion, which could arise, for example, from a retrenchment in market confidence or a reduction in the availability of credit as financial institutions come under increased stress. The initial decrease in house prices may be amplified by the links with the real sectors of the economy as lower confidence and lower household net worth lead to reduced household spending and employment. These interrelated factors would reduce economic activity and increase strains on household balance sheets.
A sharp and persistent rise in the unemployment rate would reduce aggregate income growth, making it more difficult for some households to meet their debt payments. The resulting increase in loan-loss provisions for financial institutions and the reduced quality of the remaining loans would lead to tighter credit conditions and, in turn, to mutually reinforcing declines in real activity and in the overall health of the financial sector.”


– excerpts from Financial System Review, Bank of Canada, June 2012, reported on in media, for instance 14 Jun 2012

The risk of “mutually reinforcing declines” are what many of the Vancouver RE bears have been on about for years now. This is where the superficially ‘virtuous’ cycle of debt-fuelled housing price increases suddenly turns ‘vicious’, and, by virtue of many effects (including drop in sentiment, and reduced credit, and reduced spending, and reduced employment) lower prices beget lower prices beget lower prices still. This is the process whereby we believe that Vancouver RE prices will drop far more than the average market participant is anticipating.
– vreaa

21 responses to “Bank of Canada – “Price corrections in the housing market and the risk of mutually reinforcing declines”

  1. IS the “average market participant” anticipating price declines?

    • Good point; probably not.
      We do note a good number of participants who previously argued for no declines now talking about the possibility of 15% declines.
      Commentary is far more common than prediction. And far less valuable.

  2. It is interesting. Those comments in the report related to employment, consumption, housing and the wider economy could have been written by almost anyone who frequents this site. There is not better confirmation of the thesis amongst the housing bears in the blog world. But will anyone listen to us now?…….probably not. At least we are in good company. They won’t listen to Carney either.

    • I agree and had similar impressions when reading the report. The BoC clearly knows of the risks, and of the likelihood of things turning ugly. They are in a tricky position because they do need to try to keep things orderly. I suspect that both the BoC and the MoF perceive that they have turned the market as gently as possible, thus far. They didn’t need to put on a lot more mortgage brakes, note. But I think they also know of the very significant risk of things going ‘non-linear’ at any point, quite suddenly. Some kind of external crisis could precipitate it (and be a useful scapegoat, too).

    • My experience in the States is that bears received little credit for foreseeing the crisis. In fact, you will likely hear from some people that “no one could have seen this.”

      Only Wall Streeters who made bearish bets and got rich got any attention. And that was mainly because they made money, not for warning on the housing market.

      • Snats: In fact, you will likely hear from some people that “no one could have seen this.”

        Agreed; that’s the way it always is.
        Note that we have a ‘HooCoodANode’ sidebar awaiting exactly those anticipated quotes after the implosion.

      • 100% agree with you too. In this business of bearishness on housing we can expect no thanks. Most of us are distrusted and doubted (even reviled) for forecasting what we know will be the certain negative outcomes of all this easy credit. We are raining on the parade….swimming against the tide. It is hardly likely that we will be accepted warmly with open arms for being proven correct because being correct just means every is losing equity or going broke. And that’s just a bad news event. No winning here.

        So why do we do it?….probably just hoping that we can convince a few strays to avoid the coming trap and maybe earning a few points of respect from other like-minded people. And we get to socialize and watch great movie clips while avoiding the worst of the carnage ourselves.

        The doubters meanwhile will be well served by claiming nobody could see this trama coming. For to do otherwise is to admit they foolishly took the wrong side of the bet and lost. They might even have to admit they were wrong. God no!!!

        Better to pretend it’s all a big surprise when the bad numbers begin.

  3. 30% decreases in Squamish, Whistler, Okanagan, Canmore, Muskoka etc

    • this is going to be epic!
      LOL

    • The 60% conventional mortgage figure is interesting.

    • Interesting statistics. Looks like something like only 7% of sales are to foreigners. Not enough HAM to support the whole market it seems.

      On the other hand, more than 75% of purchases are made with all cash, or a downpayment of 25% or more. That’s pretty good. If that has been the case during the bubble that will provide some protection to the banks at least. Not good for the borrowers who will lose a lot of that equity however.

      • The vast majority of the ‘downpayment of 25% or more’ crowd are move-uppers.

      • Yup. A third of all buyers were first time buyers and one quarter of all mortgages given were high ratios. Its those high ratio first timers that are most likely to lose their homes if Mom and Dad can’t step in to prop up the debt and carry some of the load as the market turns sour. Interestingly, this 25% of people utilizing CMHC and buying with less than the minimum down payment is quite a bit lower than we have been led to believe elsewhere. I have heard many times that average downs were in single digits.

  4. Lenderz gonna lend
    http://www.bloomberg.com/quote/GCAN5YR:IND

    Negative real. On a related note excessive toluene in a fuel mixture causes engine overheating. Maybe the problem is in the transmission.

    • One could only pray that banks could be diligent with lending.
      I think that is what Carney is doing in the image, probably should be on knees or all fours instead. Nice post btw VREAA.

  5. Ambiguous central bank gobbledegook.

  6. don’t like tie/shirt combo … much better … http://images.tvrage.com/shows/11/10821.jpg

  7. The line “house prices are about 30 per cent below their pre-crisis peaks” on p15 of the report is referring to the US housing market. That’s pretty clear from the context.

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