Bank Of Canada’s New Euphemism For Contraction – “Constructive evolution of imbalances”

“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” the Bank of Canada said Wednesday. …
“With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels,” the central bank said in its policy statement. “The bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.”

– from ‘Battle of housing bubble won, Carney focuses on economic growth’, Kevin Carmichael, The Globe and Mail, 6 Mar 2013

Somehow the Globe and Mail concludes that “concern about a housing bubble” has “deflated” and that the “battle of the housing bubble is won”.
We fail to follow the logic.
What is happening is that, as debt hits limits, the entire economy, overly dependent on debt spending, is slowing.
This is precisely what one would expect at this point in the cycle.
The housing bubble hasn’t even really begun to unwind yet, let alone any battle being “won”.
It is not at all surprising that there is no intention to raise interest rates.
As we have said before repeatedly, we don’t need rising interest rates for the bubble to implode; it will do so by collapsing under its own weight.
We look forward to the “constructive evolution of imbalances” that will come with 50% to 66% price drops in Vancouver.
Viva La Constructive Evolution Of Imbalances!
– vreaa

29 responses to “Bank Of Canada’s New Euphemism For Contraction – “Constructive evolution of imbalances”

  1. that’s right, the No Bubble side has ‘won’. Time for a Celebration Gala!
    May I suggest March 23, 2013, 8:00 pm?

  2. Speaking of “Evolution”… and, “LiarLiarPantsOnFire”….

    [NoteToEd: This could be either the BOC’s recent monetary policy committee meeting pondering a bi-coastal, foreclosure heat map using Fitch’s “NewSustainableHousePriceModel”… or the GovernorOfArizona reacting to the burgeoning influx of yield-starved Canadian investors. Just between the two of us, I was particularly entertained by MarkTheCarney’s exhortation to engage in, “considerable stimulus followed by modest withdrawal”.]

  3. I think it is noteworthy how close to accurate the BoC is on the Cdn housing market, compared to how little attention was being paid by the US Federal Reserve. I think a crash/correction won’t go on as long without extraordinary measures being taken here, just because the watching is too close. However, the part that the BoC cannot control is what is going on with external financial markets, globally. And that might limit the ability of the BoC to act or limit the effectiveness of what they do. Certainly the valuation of housing is still ridiculous, which increases the likelihood that a jam-job won’t work, or that it would have very large unintended consequences (such as little old ladies loading up on junior resource stocks in a revived bubble).

    • Any ideas as to what the BoC or Flaherty will do to counter a (potentially) big economic slowdown?

      Slashing rates from 1% to 0.25% probably isn’t going to help much.

      I wonder that if the trend for a lower dollar becomes more established, then both Canadians and foreign investors are going to pull more money out of “safe haven” Canada. It seems to me that the HAM money, at least, is smart enough not to invest in both a declining asset sector and a declining currency.

      • Here’s my guess as to what they will do. The BoC will respond to large Canadian bond markets other than GoC bonds that sell off in the wake of very weak housing. My guess is that will include provincial bonds in BC, Ontario, Quebec and Alberta. This will help provinces cope with lower revenues. They might buy some GoC bonds, too, if the market gets hit.

        Flaherty/Harper on their part will try a variety of goofy subsidies for cucumber greenhouses and technology ventures, and then figure out this doesn’t work too well because it can’t be done in requisite scale. From there they move on to funding (or more likely guaranteeing private funding of “infrastructure” investments). We’ll build a pipeline to paradise and then we’ll pave it. Who knows whether these investments will pay off, but they will employ a lot of people short run. Have no crystal ball of course, but that’s the way they all seem to be leaning.

      • it is pretty obvious now that capital is no longer flowing to Canada the way it was a few years ago. Slashing rates will only increase the flow out.

        I have accepted the RE market might not crash because rates are not going up anytime soon (instead it would be a long, slow, painful decade of decline and stagnation). But it might be the decline in the Loonie which helps bring about the crash. The declining Loonie, the declining RE market and the capital outflows would reinforce each other, in a negative way, and interact to bring about a panic and basically crash the Canadian economy (and some of our financial institutions).

        I notice John Johnston, former Chief Alchemist at RBC and not a guy normally given to hyperbole, is now predicting a 70 cent Loonie with the decade. He was on BNN the other morning predicting we too will have a Balance Sheet Recession, like Japan and the US.

      • We’ve long thought the loonie was worth about 85c, fair value.
        Watch it bounce here (at 97c) first though (the speculative shorts are at record highs). So, not going down in a straight line.

      • I have noticed a lower dollar is having an effect on the “real” price of real estate, especially Vancouver in my chart of real prices here:
        The BoC Commodities Index (CCI) in CA$ shot up in the Feb 2013 data with the sell off in the Loonie. Without any advance in the Vancouver SFD price this last month, you can see that the “real” price of Vancouver SFDs continued slumping.
        Also the CPI put in a print of 0.5% and that is helping to propel the real interest rates charted here:
        Perhaps Mr Market is going to do the job of repricing assets without fussing over any policy.

  4. Real Estate Tsunami

    The Brits are in for a treat.
    They will need a translator to understand his “linguistic contortions”.
    These Canadians don’t speak the Queen’s English!
    vreaa, why don’t you apply for the position?

    • They’re in for a ‘treat’ all right, RET… but I don’t think they’re going to like it.

      [FT] – Osborne to hand Carney more powers

      …”George Osborne’s Budget will pave the way for Mark Carney, incoming Bank of England governor, to come to the rescue of the economy as the chancellor sets the scene for a new era of looser monetary policy.

      …In a sign that the BoE is already gearing up for a more activist monetary stance under a new leader, MPC members have been competing with each other to show their flexibility over the past month. Sir Mervyn and Paul Fisher joined David Miles in voting for more quantitative easing at the February MPC meeting and, more recently, Paul Tucker said the idea of negative interest rates should be considered.

      …Alan Clarke, of Scotia Bank, last week changed his prediction to expect more QE on Thursday. “Numerous MPC members spoke over the last week and we judge that there is no smoke without fire. The Bank is no stranger to delivering surprises and it would get more bang for its buck in terms of market reaction by delivering a QE expansion while it is still (mildly) non consensus,” he said”…

      • Real Estate Tsunami

        The Brits will not like it when Carney calls the Queen QE.
        These Canadian lumber jacks have not respect.

      • For example….

        [UK Independent] – Nearly five million Britons ‘struggle to put a square meal on the table’

        or this one….

        [UK Telegraph] – Knights of Malta to open soup kitchens in Britain

      • Evidently… things are far worse than even I could have imagined…

        Members of PETA are cautioned to look away now, as for the rest of you, DearReaders… such as it is… here’s your ThursdayMorning’Zen’ & Quote ‘ O TheDay…

        “By virtue of your treatment of this small, unfortunate rodent you’ve destroyed your good character and acquired a criminal conviction.” – District Judge Roy Anderson, Selby Magistrates Court, York

        [BBC] – Animal ban for student who fried flatmate’s hamster

  5. The key phrase was “Debt to income ratio stabilizing near current levels.” The bank wasn’t upset with the current debt levels, but they didn’t like the trend of increasing debt levels. Changes were implemented to curb this increase and those changes have been successful.

    I do not believe any comment can be inferred about the value of housing from the banks statement. That of course didn’t stop the media from making the leap on their own.

  6. To say anything else would not be prudential

  7. “Gains in U.S. home prices sends household wealth soaring $1.7-trillion to 5-year high

    Alex Kowalski, Bloomberg News | 13/03/07 2:23 PM ET

    Household wealth in the U.S. climbed in the fourth quarter to the highest level in five years, propelled by a gain in home prices that is helping repair family finances.

    NET WORTH for households and non-profit groups increased by US$1.17 trillion from October through December, or 1.8% from the previous three months, to US$66.1 trillion, the Federal Reserve said Thursday from Washington in its flow of funds report. It was the highest since the fourth quarter of 2007…

    …CoreLogic Inc. said last month that the national median single-family home price climbed 10% in the fourth quarter from a year earlier, the biggest gain since 2005…

    …Economists Karl Case, John Quigley and Robert Shiller found that changes in house prices — and in real estate wealth — have a bigger impact on consumer spending than the ups and downs of stock prices and financial wealth…

    …As household wealth improves, Americans are gaining confidence to borrow. Thursday’s flow of funds report showed household debt increased at a 2.4% annual rate from October to December, the biggest advance in almost five years. Mortgage borrowing fell at a 0.8% pace, the smallest decrease since the first three months of 2009, the last time it rose. Other forms of consumer credit, including auto and student loans, climbed at a 6.6% pace, the most in five years…

    …Gains in pay are helping consumers meet their loan payments even as debt climbs. Mortgage and consumer-loan payments in the third quarter amounted to the smallest share of after-tax income since 1983, according to Fed figures issued in December. The debt-service ratio was 10.6% of disposable income from July to September. Five years earlier, the figure peaked at 14.1%.”

    Pay off a little debt, and then go right back to the borrowing.

    • I wonder if that’s too much of an excerpt to include. If so, feel free to edit out some of it, and I’ll understand how much is acceptable.

    • Real Estate Tsunami

      As household wealth improves, Americans are gaining confidence to borrow….
      Have we not learned anything?

  8. “What is happening is that, as debt hits limits, the entire economy, overly dependent on debt spending, is slowing.”

  9. calamity jane

    What is happening is that our country is hopped up on too much adrenaline. Shortly, within a matter of weeks, we get an exogenous shock, perhaps a collapse in oil or gold prices, that puts the nations adrenals into shock. Any more additional adrenaline is treated as toxic to the system, and the body/economy shuts down. This malady is commonly referred to as Fibromyalgia.

    • If you can transform Fibromyalgia into something that is really appropriate to residential real estate, you could be the one to come up with a totally new and appropriate word that everyone will be using to describe the bursting of a real estate bubble.

      This could be an historic opportunity.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s