What can be done about unsustainable housing market growth?

What can be done about unsustainable housing market growth?

What can be done about unsustainable housing market growth? One industry leader believes Canada’s economic recovery – lead in large part by the housing market – has been unsustainable; and he is calling for action from the Bank of Canada.

“The possibility of growth surprising to the upside in Canada is increasing. Despite quite high valuations, the Canadian housing market remains robust as consumers are able to take on more debt at very low rates, which in turn could drive overall economic growth to levels potentially higher than anticipated,” Ed Devlin, managing director with PIMCO said in his latest analysis of the Canadian economy. “It sounds like investors should be happy, right?”

Not so fast.

According to Devlin not all growth is equal and in Canada – since the financial crisis – much of the growth has been a result of record-low interest rates. And this sort of growth isn’t sustainable.

“Canada has been driven by consumers borrowing money at incredibly low interest rates to buy ever-larger houses and to fuel consumption,” Devlin said. “This is not exactly healthy growth, but when the economy is in a free fall post a financial crisis, any growth is better than none.”

Devlin acknowledges the difficult position the Bank of Canada is in, but he has also called for more action from the government.

“BoC Governor Stephen Poloz has been dealt a difficult hand; the BoC has to be very careful of the trade-off between growth and financial stability. Given the ‘serial disappointments’ in the robustness of the economic recovery, the BoC has stressed downside risks to inflation in order to depreciate the Canadian dollar and in turn spur economic growth via increased exports,” Devlin said. “The objective is noble, but the problem with talking down a currency is that if the talk is not followed up by actions, the speculators who are shorting the Canadian dollar today will likely close their positions, leading to an inevitable short covering rally.”
5 Comments
  • Glenn May-Anderson 2014-10-03 12:19:27 PM
    Another misleading headline. And let's remember that the PIMCO article focuses on the bond market, and how BoC policy could affect mid-term and longer-term yields. This is different than an actual analysis of the sustainability of the housing market in Canada.

    For those interested in getting the actual facts, I would recommend this link:

    http://fortressrealdevelopments.com/news/stat-chat-summary-key-conclusions-and-links-to-further-readings-september-2014/

    Yes, Ben works for a development company. Yes, he determines which markets that development company should invest in, and which projects they should approve and which they should decline. This is because the company in question makes their money on successfully exited development projects, and takes profits on completion.

    Add to that the CMHC data, and comments from Will Dunning and Benjamin Tal, and I think you will find it to be a far more balanced article if you are interested in the real picture for the housing market in Canada.

    Conjecture is one thing. In this case, it's more important to get the FACTS.
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  • Bob 2014-10-03 2:36:46 PM
    Just another example of a misguided moron that has no idea of what is really happening in the real estate market!
    Having been a real estate sales professional for 36 years, this is just another person crying wolf. Every 5-8 years there is a so-called expert that decides they know what is happening in the real estate market when they know absolutely nothing other than panic!
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  • Ron Butler 2014-10-03 3:39:32 PM
    Well, I don't think that every article that suggests Canadian property values may be overreaching and subject to possible reversal in values needs to be attacked by people with a vested interest in convincing customers that property values will increase eternally.

    It never hurts to consider an alternative outcome to infinite value run-up. This person may be wrong but even a broken clock is right twice a day.
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