BOC Warns Of Circumstances That Their Very Own Policies Have Encouraged – “The most important risk to financial stability is the elevated level of household indebtedness and stretched valuations in the housing market.”

“High household debt and a heated housing market remain the biggest domestic threats to Canada’s financial system, the Bank of Canada said on Thursday, despite tighter mortgage rules introduced by the government in July.
“The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market,” the central bank said in its semi-annual Financial System Review.
Canada’s financial system remains robust but the overall risks to the stability of the banking sector remained high, unchanged from June, it said. …
Housing prices and construction in Canada roared higher in 2011 amid low interest rates, sparking fears of a U.S.-style bubble. The market started to slow after the government tightened rules on mortgage lending in July, the fourth time it had acted to curb borrowing since 2008.
The Bank of Canada’s two-year freeze on interest rates is also seen as a reason for the credit binge and the bank has said it could, as a last resort, use monetary policy to address the problem.”

– from ‘Bank of Canada says housing market risk still high’, Reuters, 6 Dec 2012

“Chief among those domestic concerns is record-high household debt, the inevitable result of rock-bottom interest rates that, nevertheless, have acted as a buffer against even more worrisome threats from outside Canada.”
– from ‘Bank of Canada warns own low rate policy poses risk to economy’, Financial Post, 6 Dec 2012

The Bank is warning us of a problem, while simultaneously confessing that its own ongoing policies have caused and are perpetuating this problem.
– vreaa

62 responses to “BOC Warns Of Circumstances That Their Very Own Policies Have Encouraged – “The most important risk to financial stability is the elevated level of household indebtedness and stretched valuations in the housing market.”

  1. Well goodness me, would we all prefer interest rates at 4% and unemployment at 11%? The bank’s policies have been eminently reasonable considering core inflation and unemployment, and it’s hardly their fault if Finance won’t take a hint — nay, a shouted, explicit demand, over and over again — to use policy to address macroprudential risk.

    • This is the most explicit that the Bank has been about the conundrum of low rates. To our recollection this is the closest they’ve come to saying “we know it’s a problem but we can’t do anything about it”.
      We’re not expecting interest rates to rise.
      (And, as we’ve said repeatedly before, the Vancouver RE bubble can collapse without a rate increase).

    • Yes, the world would end if the central banks were not keeping interest rates below inflation. This can go on forever and god forbid we would ever go through a period of adjustment, liquidation of malinvestments from bubble and move to a more sustainable model. And who gives a damn about savers. As long as we can borrow at cheap rates so that realtors, interior designers and construction workers can keep their jobs, everything will be fine.

      • Ralph Cramdown

        Yes, who gives a damn about savers? I get it. I’ve accumulated a surplus, I rent, and I manage money for other family members. It’s a tough hustle every day to find the risk adjusted returns I’m looking for. But I don’t feel the world owes me risk free returns above inflation. You want returns? Take some risk. Yes, there was a recent period when you could buy a 30 year government bond, sit on it for a decade, and look like an absolute genius all the while forgetting the risks that were present when you first bought it. Move on, it’ll be a while before that trade works out like that again.
        Historically, creating mass political movements sympathetic to those living off their income has been difficult. Calling them ‘savers’ rather than ‘the parasitic classes who control the means of production’ is probably a good marketing move, though.

      • Calling them ‘savers’ rather than ‘the parasitic classes who control the means of production’ is probably a good marketing move, though.

        This is some good Marxist propaganda. Do you have more?

        As for risk-free returns, I never said that I expect them or that I am entitled to them. It’s just your bias and not understanding the role of savings in economy that leads you to incorrect conclusions.

      • Ralph Cramdown

        The role of savers is to find the safest investment they can find, then bleat about how it doesn’t pay. I can show a saver yields of 3% all the way to 25%, and for each one I’ll be told “too risky.” Now once somebody starts calling himself an investor or perhaps even a capitalist, there starts to be hope.

      • When I save, doesn’t the bank reinvest my savings?

    • Real Estate Tsunami

      Please explain why higher interest rates should automatically lead to higher unemployment. Germany has high interest rates but low unemployment.
      IMO, the low productivity of Canadians is a big problem.

  2. Which is why the are turning to government lending policy and mortgage insurance to quench credit growth.

    • Yes, at long last. But I see so many people on the comment boards everywhere blaming Carney and imploring him to raise rates, notwithstanding that the economy doesn’t seem to have been running at NAIRU since at least before the GFC.

      • “NAIRU”… How thee doth warm my ChristmasCockles… I don’t think I’ve heard anyone drag that old donkey out since the nineties. TeeHee! [just teasing, RC]…

        …”Since 1974 seven Nobel Prizes have been given for work critical of the Phillips curve. Some of this criticism is based on the United States’ experience during the 1970s, which had periods of high unemployment and high inflation at the same time. The authors receiving those prizes include Thomas Sargent, Christopher Sims, Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek.[2]”…

        [NoteToEd: A long time ago… in a galaxy far, far away… ‘Nem’ penned a PooPooPolemic entitled, “Empirical Ratiocination of the Phillips Curve”. No invitation to Stockholm… but the faculty liked it.]

      • Ralph Cramdown

        My take on it was that Greenspan put the cart before the, er, donkey with his reasoning so: “Since I am the world’s greatest central banker, there are no bubbles on my watch. Since unemployment is running below NAIRU and inflation is low (do NOT look at the NASDAQ or house prices!) I dub these times ‘The Great Moderation,’ declare that the business cycle is dead and blame, um, increased productivity through technology!”
        I say the guy’s a bum and inflated not one but two bubbles, three if you count his head.

      • 4SlicesofCheese

        On the flip side we have people praising Carney on what a fantastic job he is doing. If I were to guess, I would think those people are the types who are up to their eyeballs in debt and living in this fantasy land where they believe Canada is invulnerable and look down on other countries.

        Back to the topic.

      • Ralph Cramdown

        I’ve been reading Don Coxe for 20 years. He’s a great writer, but his one big bet for the last fifth of that has been zigzagging East, returning basically nothing except volatility.

  3. Kill all baby boomers

    In before all the goldbugs

  4. The biggest danger is that economies become “hooked” on low interest rates… ZIRP is now seen as a legitimate policy tool as opposed to an “emergency”. Look how long we’ve had “emergency” rates after the 08-09 GFC…

    • UncleSam spends 40% of every dollar in current tax receipts servicing debt. From his perspective, ZIRP isn’t just a policy tool – it’s a ‘must’.

      • Ralph Cramdown

        You got numbers on that? I’m seeing 10.9% in interest on the net public debt, 19.7% if you include interest payments to other arms of government which hold treasuries, as of 2011.

      • You would ask me that. “Grrr”…

        Let’s see, over 16T and currently running at something approaching ~101%USGDP, and with gross fiscal 2012 interest payments somewhere in the 300B neighbourhood which apparently is consuming about 14% of 2012’s tax receipts… (which are themselves about 1.3T short of total expenditures)…

        40% bubbled out of my over-caffeinated brain on the basis of something I had recently read… and could I find it? Eventually. Yes. A projection based on interest rate normalization… here it is… with backgrounders to follow…

        [Forbes] – Fiscal Cliff Just A Canard, Government Debt The Real Killer

        …”The economy will encounter extremely dangerous terrain whether or not Congress figures out a way to wriggle out of the 2013 budgetary straightjacket. The debt burden that the United Stated will face when interest rates rise presents a much larger “fiscal cliff.” Unfortunately, no one is talking about that one.

        The current national debt is about $16 trillion (this is just the funded portion…the unfunded liabilities of the Treasury are much, much larger). The only reason the United States is able to service this staggering level of debt is that the currently low interest rate on government debt (now below 2%) keeps debt service payments to a relatively manageable $300 billion per year.

        On the current trajectory the national debt will likely hit $20 trillion in a few years. If by that time interest rates were to return to some semblance of historic normalcy, say 5%, interest payments on the debt would then run $1 trillion per year. This sum would represent almost 40% of total federal revenues in 2012.”…

      • RoboRedaktor is feasting today, IllustriousEd… there’s one trapped right here….

      • Backgrounders to trapped comment…

        [USNewsWorldReport] – National Debt Interest Payments Dwarf Other Government Spending [CHART]: Taxpayers spend $220B per year paying off interest on the national debt

      • [CNN] – Washington’s $5 trillion interest bill

      • At the risk of severely titillating Dr. J… here’s the raw data in tabular format (also available in PDF/Excel)…. courtesy of the Urban Institute and Brookings Institution’s Tax Policy Centre

        Historical Federal Receipt and Outlay Summary: 1940 – 2017 [Projected]

      • Real Estate Tsunami

        US debt = 16,000,000,000,000
        Daily deficit = 4,000,000,000
        God bless America

      • Ralph Cramdown

        Yeah, that’s basically what I had, with revenue at $2.3 trillion (hat tip Heritage Foundation!)

        That US News article was funny. “Interest DWARFS other spending! Please Ignore the army, medicare and medicaid, which collectively make up 7x interest payments, and the USDA, 2/3 of interest”

      • Ralph Cramdown

        US Daily deficit = 4,000,000,000
        Yowza! That’s 250x the Koch brothers’ daily surplus. How could a country be so irresponsible to run such a deficit coming out of the biggest bust since the Great Depression? Liquidate the seniors! Liquidate the indigent! Liquidate the hungry! Liquidate the Army!

    • Any time that something is declared an “Emergency Policy” by a government people should very worried.

      Ten years on, how is ZIRP going to help us? We’ve already shot the economy up on the financial equivalent of amphetamines and it’s still lethargic if not moribund. At some point one needs to admit that conventional approaches and models are just not working and might therefore be wrong.

      • Naked Official #9000

        This is disharmonious bandit sedition!

        Kill the four pests! Especially the swallows! They are exceedingly disharmonious!

      • Ralph Cramdown

        I thought the conventional approach was for the government to take up the slack in aggregate demand by putting people to work so they’ve got money to spend — and we’d get to keep the created infrastructure as a lagniappe.

      • Cyril Tourneur


      • Ralph Cramdown

        Who holds up the top left corner of a balance sheet, looks at the numbers, and says “GAH, THOSE ARE SOME HUGE NUMBERS” without looking at the rest of the balance sheet?


        That’s what exactly what the Page3 editors used to say, albeit prefixed by Phwoar! vs. GAH…

      • Speaking of ‘huge numbers’…. PM Stevie ‘Jīangbăidù’ Harper made it official this afternoon…

        “To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead.” – PM Stephen Harper [While announcing that his government approved the $15.1-billion (U.S.) bid by China’s CNOOC Ltd. for Calgary-based Nexen Inc., and the $6-billion (Canadian) acquisition by Malaysia’s Petronas of Progress Energy Corp.]…

        [G&M] – Nexen, Progress Foreign Takeover Deals Approved by Canadian Government

        ….”The federal government has said Canada needs $650-billion to finance resources development and that much of that capital will have to come from overseas, where state-owned companies dominate the landscape.”….

        [NoteToEd: Told ya so. Indubitably 2012’s supreme contender for the GuinnessWorldRecord in Newspeak/Doublethink/Doublespeak. Next up… “Géxià, would you like some condos with your crude?”]

      • Ralph Cramdown

        So the Conservatives are only against state owned enterprise operating in the ‘patch when the enterprise is called ‘Petro Canada’? Duly noted.

        I especially enjoyed the part where our Feckless Leader admitted he hadn’t gotten a damn thing in reciprocity or guarantees in return for this agreement.

  5. Well… since we’re on the topic of banks… many here might find the following Guardian piece instructive if ‘somewhat’ less than amusing…

    [UK Guardian] – Bank staff ‘still feel pressured into selling unsuitable products’

    …”Staff at Britain’s big five banks feel under pressure to sell to customers, according to research by Which?, despite promises the institutions have changed their ways and removed the incentive schemes that fuelled the mis-selling scandals of the past.

    Interviews with more than 550 frontline staff found that despite the banks paying billions of pounds in compensation to consumers for mis-selling insurance and investment products, nearly half of those employed in a sales role felt they were expected to push products, regardless of whether they were appropriate to the customer.

    Employees from HSBC, RBS, Lloyds Banking Group, Santander and Barclays – including staff from branches and call centres – took part in the interviews, which were carried out between 22 October and 4 December. A total of 371 had sales roles, and of them 298 had been set targets.

    Across the board, two-thirds said they had been told to sell more at some point, with the need to hit targets the key reason in a quarter of cases. Increasing profits was given as a reason in 16% of cases, and the customers’ interests were the priority in just 6%.

    Just over a third of those questioned said they were uncomfortable with the level of pressure to sell they were put under by their employer.”…

    [NoteToEd: It’s definitely not different here.]

  6. RoboRedaktor stikes again. “Help! Help!”

  7. The BoC has never been shy to admit this. Basically they’re saying that they have no choice but to keep interest rates low, but of course this low rate policy comes with a whole host of negative consequences, such as…. They seem to be citing the negatives more often lately, likely trying to prime the markets for an eventual rate hike next year.

  8. Arsonists admit their love of starting fires may be responsible for many houses burning down.

  9. Take it from a crack dealer, you’re all addicted to that stuff.

  10. Real Estate Tsunami

    I believe that Carney is leaving the Titanic.
    10 years of practically free money has turned Canadians into speculation addicts. When a doctor can make more money flipping condos then curing patients, then we have a problem. Right now, with condos tanking, will he be able to focus on the needs of patients?

  11. Hey, does anyone know what the problem is with VCI? Site is always crashing. BTW, had lunch with a friend today who volunteered to me that he signed up with a contractor to build him a $300,000 laneway house 700 sq feet, on the westside. That’s not the final bill, mind you, that’s the estimate. My friend also pays any overages.

    He hadn’t really thought of what he could rent it for, but he’s thinking maybe $2000/month. I don’t know if that is totally realistic. I wouldn’t want to live in a shoebox in an alley, but I guess it is the BPOE. If you don’t count the $1.5M it cost to buy the house, then the return on his project, assuming he can rent it, is maybe 10%.

    Also seems odd that it costs more than 2x the average US home price just to build a 700 sq ft shoebox in Vancouver, not including the land. I don’t think this is going to end well. Total unforced error.

    • I saw your story over at VCI, teed it up for a headline, before seeing it here. The world is a mysterious place.

      The error of leaving out the cost of the land in their calculations is common. Also, the tolerance of the preposterously high cost of building a fancy shed.

    • Real Estate Tsunami

      $ 2,000 a month!!! for a garage!!!!!!
      I rent a house in Ditchmond for 1,500.
      That’s what the RE hype does to normal people.
      People wake up, this is crazy.

    • Ask your friend: if he quit his job, and spent 40 hrs a week building the shed by himself, how long would it take him? 1 year tops? Assuming he could find a job again easily, which would be the smarter move financially: paying someone $300k for a shed, or buying the materials himself and foregoing 1 year of salary.

  12. Another BoC muppet show for Canadians. Rates will never go up before a devaluation or revaluation of the Canadian dollar. The sooner one understands that, the sooner one can make better investment decisions.

  13. Seeking knowledge...

    Regarding HamS’s $300k to build a 700 sq ft laneway house, I don’t understand why it is sooooo expensive to build here compared to the U.S. is it because of higher material cost due to economies of scale? Is our labour rate that much higher? Please explain.

    • It costs more to build here because, over the years, people have tolerated paying more and more, and it just got out of hand.
      Sounds circular, and in some ways it is.
      Sure there are higher labour costs/economies of scale/(taxes?)/(bureaucratic costs?/city hall?)/etc but, more important, as people believe that values of everything RE rise, they are prepared to spend more and more on all things RE.
      Q “what’s the difference between a lane way house and a shed?” A “$280K”; etc…
      We’ve brainwashed ourselves, folks; lost perspective.
      The cost of decent construction in BC circa 2012 should be much lower.

      • Real Estate Tsunami

        The construction costs are not much higher here. Land maybe.
        Most of it is Developer’s, Builder’s profit.
        They know that they can charge pretty much anything, because prices will go up forever.
        Their pockets are full of cash. That’s why they can be patient in the face of slowing sales and rising inventories.
        But there is a limit to their patience, and I think once the tsunami of listings hits the market in spring there will be panic selling.

      • Let’s say construction costs are twice what they are currently. This requires me to pay more? Um I don’t think that’s how it works, but it’s a convenient refrain from those wanting lower permit fees and taxes on one side and increasing margins on the other.

    • Take it from the contractor’s mouth…

  14. Is yattermatters circumcised?

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