Friday, October 27, 2017

Housing: Part 265 - Canadian edition

I am keeping an eye on Canada.  The central bank has begun to raise rates.  Home prices, especially in Vancouver and Toronto, have reached very high levels, and concern about high prices seems to be affecting public opinion about monetary policy, as it has in the US.

They seem to be in danger of doing the same thing we did in 2007.  Prices peaked and have fallen back, especially in Toronto.  They seem to be in a sort of 2006 place right now.  There is a sense that "the bubble is over", but general growth still seems reasonable.  They could manage it well.  But, declining home prices are probably a sign of disequilibrium.  If they treat it as a return to normalcy, they will underestimate the contractionary level of their policy.  It will be interesting to see how things proceed.

Here is a post at seekingalpha that reflects the broader problem.  I don't mean to single this author out.  This is the typical reaction I see.
The thing about economic expansions is that people are supposed to work, pay down debt and build up savings, so that they can ride out the economic downturn that follows. Canadians have done the opposite over the past 8 years, and now approach 2018 with the highest debt and lowest cash savings in decades.
This is understandable.  It seems like excessive demand is the problem - excess lending, speculations, foreign investors, etc.  So, it looks like Canadians (just like Americans, Australians, Brits, etc., etc.) are profligate and short-sighted.  And, this subtly works its way into the public consensus about what needs to be done, how much growth or contraction we will demand, how much sympathy we should have for bankers and homeowners, etc.

The problem is the story is backwards.  In a Closed Access economy, growth naturally leads to rising debt levels, because at the center of the economy is regulated access to opportunity.  It is inevitable - unavoidable.  A bidding war ensues for residential access to lucrative labor markets.

That debt isn't from profligacy.  The debt is a transfer of wealth.  The debt is the result of economic rents that must be paid to the owners of the restricted asset.  So, inevitably, when the economy grows, earners have to take a haircut.  They have to pay off the landholders.  This creates debt and economic stress.

I am not as well versed on the empirical evidence in Canada, so I can't say that I am certain about the story there, but it seems to have all the relevant inputs.  In 2006 and 2007, America became infected with a sense of vengeance, or at least a lack of sympathy.  This is probably the core question about the Canadian economy in the months ahead.  Do they approach housing contractions with sympathy, with resignation, or with bitterness?  Sympathy might save the day, even with the wrong model of what is happening.


  1. You still have to conduct monetary policy along the lines of an inflation-targeting regime. Having a "closed access" economy is a form of negative supply shock. And ultimately it is a central bank's job to managed demand such that it doesn't overshoot supply. There is no evidence that we will fix the "closed access" problem therefore it needs to be treated as a long-term negative supply different than a drop in productivity.

    I'm not saying you tighten simply because housing is hot. But once inflation is at-target you need to have balanced monetary policy and be vigilant about inflation. With inflation dipping back down, i'm guessing the BOC will back off - the bond market is telling you exactly that.

    Truthfully, central banks should be much more outspoken about "closed access" as a negative supply shock but they apparently don't see it.

    1. Good points. Thanks for the input.

      I'm not sure, though, that the flattening yield curve is such a good sign.


    The China capital controls are probably playing a role in Canadian housing prices, and maybe come US cities.

    Egads: "Josh Gordon, of Simon Fraser University, said National Bank of Canada economists estimate “almost $13 billion Cdn was spent by Chinese investors in Vancouver in 2015 alone. This represents roughly one-third of all home sales volume in that year.”


    Real Estate Association of Greater Vancouver figures show the median price of a detached home is down more than $500,000 since February, to $1.7 million.


    Yes, I guess China money plays a role.

    This is another curve ball for monetary policy.

    Of course, my first preference would be that monetary policy guys start to talk about closed access cities and zoned property, and the havoc it plays with migration, housing affordability and job formation, living standards etc. When they meed in Jackson Hole, they just jibber-jabber about inflation.

    Evidently it take a lawyer to think about the issues…not yet a macroeconomist...

    1. There is plenty of foreign money in real estate in Florida, Texas, and Arizona. Is that a problem for monetary policy in those states?

    2. If u want to hire a plumber, it is!

      Kev I have reused your language and logic at a few city council meetings. Royalties will be truant until we win concessions, to b paid thereafter in gift purchases of ur books

  3. If a central bank is "fighting inflation" then exploding housing costs become a problem...

  4. Excellent post. Yes, in my party of one we are against the home mortgage interest tax deduction and property zoning.