Wednesday, June 19, 2013

BoC Warns Against the Obvious

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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 analysis.

1 comment:

  1. Maybe the BoC and all the so-called "Financial Researchers" should get out of their air-conditioned offices on Bay Street and walk the streets of Toronto for a day and see what the "real world" of consumers and buyers have to say about the "demand/supply" side of condos in Toronto! Maybe a good brisk walk would smarten them up and stop them from making stupid statements about the "downfall" of Canada's economy! Or is it just wishful thinking on their part?