Last Thursday the Bank of Canada warned
against the obvious: condos are overpriced and this poses a risk to the
whole economy. The BoC singled out the Toronto market, noting that the
country’s largest city also hosts the largest number of unsold units –
some of which have yet to be built. The BoC neglected their own role in
causing this misallocation and instead urged bureaucrats to continue
intervening to migrate any further risks. Nevertheless, the BoC is
convinced the Canadian economy has improved since the ’08 crisis.
In its first paper since Stephen Poloz took over, the BoC said, “if
the upcoming supply of units is not absorbed by demand as they are
completed over the next 12 to 30 months, the supply-demand discrepancy
would become more apparent, increasing the risk of an abrupt correction
in prices and residential construction activity… any correction in
condominium prices could spread to other segments of the housing market
as buyers and sellers adjust their expectations.”
This process, admits the Bank, would “shatter” consumer confidence
and cause a drop in spending. This, of course, would lead to
deteriorating credit conditions and turn Canada’s inflationary boom into
a recessionary bust.
A Bank of Montreal economist, Robert Kavcic, had this to say:
“There are about 50,000 units under construction right now … and the
demand is probably not going to be there to absorb that, so it’s a
risk.” Kavcic recommends renting.
Nevertheless, the Bank of Canada insists that the housing market can
still experience a soft-landing – if interest rates remain low. But
Poloz has suggested that the long-term dangers of low interest rates may
creep up even when the system appears to be working in the short-run.
New Bank of Canada Governor Stephen Poloz is no Henry Hazlitt.
If Poloz really understood the long-term risks of artificially low
interest rates, it’s likely he never would have gotten the job in the
first place. It looks as if Poloz and the BoC are just covering their
own asses for the financial calamity that’s about to rain down on this
country. While mainstream opinion might scapegoat Harper’s government,
Chartered Banks, indebted consumers, or real estate agents – all these
targets miss the mark when the Bank of Canada is excluded from one’s