Wednesday, May 24, 2017

Housing: Part 231 - Bloomberg to Canada: Time to Party Like It's 2008!

The article's title is "Canada Must Deflate Its Housing Bubble", from the editors.  And it is a panoply of the errors that led us to our 2008 debacle.

The problem is home prices.  Period.  There is no other reason to demand tight money in Canada.  Inflation has been moderate for years, unemployment has basically been flat at around 7% since 2012 (still 1% above the pre-2008 bottom), and, since 2012, annual nominal GDP growth has ranged between 0% and 5%.

High home prices are blamed on "foreign money, local speculation and abundant credit".  No mention of supply constraints.  It would take a decline of 40% for Toronto home prices to fall back to historical norms relative to incomes, according to the article.

Just as in the US, in practice what Bloomberg is calling for is to kneecap the economy until they get the housing collapse they think they need.  A 10% or 20% or more collapse in housing prices will be seen as success - a "correction".

"Granted, the bubble bears little resemblance to the U.S. subprime boom that triggered the global financial crisis." says the article.  Except that it does.  The resemblance is just in the place where Bloomberg isn't looking.  There is little resemblance from a demand side (credit) perspective because this is a supply problem, and in every country people collectively view what is going on and blame it on whatever happens to be the credit and monetary regime in place at the time.  Homes always require a healthy credit market, and when home prices are high, unsurprisingly, credit markets are always active.  You would think the lack of a resemblance would be a clue that credit and speculation aren't the fundamental causes of the price boom, but the blinders are just too strong on this issue.

That being said, the structure of the private securitizations market in the US was especially primed for a vicious cycle once expectations turned south.  Canada has a better banking system, so a financial crisis is less likely.  If they go down this path, it will be interesting to see how different it will be from the US contraction.

The Bank of Canada didn't take Bloomberg's advice, and signaled that they will keep the policy rate at 0.5% today.  Good for them.  As chatter about a housing bubble continues, it bears watching.


  1. "High home prices are blamed on 'foreign money, local speculation and abundant credit.' No mention of supply constraints."--KE

    Sad to say, Scott Sumner mentions this in his latest blog and also…does not mention supply constraints. Er, property zoning.

    I guess if you consider 'supply constraints'---the unmentionable property zoning---to be a force of nature, then foreign inflows of capital, credit and speculation do explain house prices. Well, not entirely, but sort of.

    I am waiting for free-marketeers to call for an end to property zoning and the home mortgage interest tax deduction.

    I am also waiting for Eisenhower's third term to start.

    1. I'm not sure why you are so hard on Scott. Just about the only reason anyone knows about my project is because of Scott's long-term support for it. You're asking for too much.

  2. Well…I am not that hard, and because I expect more from Scott Sumner, who is an original thinker and intelligent guy. He broke with right-wing orthodoxy on monetary policy (i.e., money should be tight, always and everywhere, and zero inflation is divine).

    The usual right-wingers never even get that far.

    I think Sumner's NGDPLT approach is the best, though I wish for a higher target.

    And why all the concern about labor shortages but never housing shortages caused by property zoning?

    We see rising labor participation rates now in Japan, meaning the labor markets can adjust (sheesh, let's wipe out SSDA and VA disability in the U.S., I am no leftie)

    But property markets cannot adjust. By regulation and law.

    So shouldn't the topic be property markets and zoning?

    I will not try to sound too cynical. I will put down my hammer & sickle shaming flag.

    1. "And why all the concern about labor shortages but never housing shortages caused by property zoning?"

      My guess is that matters that are totally local receive less attention. Zoning also does have some reasonable aspects, which means that it is harder to evaluate it on a purely econ basis.

      You've probably attended some local approval meetings. The level of discourse is often so low. No imaginations. Change = risk, so the fight for the status quo is intense.