Central bank’s ‘talk down’ of hot Vancouver housing market won’t work: B.C. economists


Friday, June 10th, 2016

‘Talk down’ of hot housing market futile: Analysts

PETER O?NEIL
The Province

The Bank of Canada’s bid on Thursday to “talk down” Vancouver’s skyrocketing housing market will likely fail, say B.C. economists.

In an unusual move, Governor Stephen Poloz warns in a report that soaring housing prices in Toronto and especially Vancouver are unsustainable and that a “correction” is possible if the economy falters.

Poloz also says the surge appears to be driven in the two markets on the assumption by buyers that the recent, staggering increases will continue.

The benchmark price for a detached home in Metro Vancouver soared to more than $1.5 million in March, 37 per cent higher than a year earlier, according to the Real Estate Board of Greater Vancouver.

The governor is engaged in an age-old practice by central bank leaders of using words rather than action to temper enthusiasm, said B.C. Central 1 Credit Union chief economist Helmut Pastrick and B.C. Business Council chief economist Ken Peacock.

But that warning, and government hints of possible policy changes to deal with the impact of deep-pocketed foreign investors, won’t likely frighten determined buyers, they said.

“I don’t see the market cooling any time soon,” said Pastrick, though he agreed that annual increases in the 20- to 30-per-cent range are unsustainable.

But he said only a major recession would, as Poloz acknowledged, cause a significant market “correction” that would move prices south, according to Pastrick.

Peacock said the central bank is hoping to avoid a real estate “bubble” that could cause serious economic damage if it bursts. One of the key elements of a bubble — purchases made solely on the assumption price surges will continue — is clearly driving many purchases, he said.

Like Pastrick, he said it will take more than a Bank of Canada press release to contain the speculative frenzy in many Metro Vancouver markets.

Prime Minister Justin Trudeau, meanwhile, warned Thursday that the affordability crisis in Toronto and Vancouver is a “drag” on the national economy.

“Rising home prices, uncertainty around being able to buy your first home or upgrade as you want to grow a family, is a real drag on our economy and a real drag on Canadians’ opportunities,” the prime minister said.

The government has been studying data on the dynamics driving higher prices, but Trudeau cautioned that Ottawa is limited in its options in areas like foreign investment.

“When you talk about federal government action we have such heavy levers that impact the entire country; we have to be very careful about how we engage,” he said.

There is still a need, he said, to attract foreign investment to create jobs and boost economic growth across the country.

n his twice-a-year assessment of the health of Canada’s financial system, Poloz says economic fundamentals — strong growth and a steady inflow of migrants from the rest of Canada and overseas — aren’t strong enough to support continued sharp price increases in the two cities.

The report warns that these trends raise “the possibility that prices may be supported by self-reinforcing expectations, making them more sensitive to an adverse shock to housing demand.”

The resulting high prices and heavy household debt in the two cities could result in “shocks throughout the financial system” if a major event, like a severe recession and resulting spike in unemployment, leads to a “broad-based” correction in house prices.

But the central bank cautions against an overreaction to its warning.

“The probability (of a severe recession) remains low as the economy continues to grow, supported by continued expansion in the United States, and accommodative monetary policy and fiscal stimulus in Canada.”

Neither Poloz nor Bank of Canada senior deputy governor Carolyn Wilkins would comment at a news conference on the bank’s possible policy recommendations to deal with sky-high housing costs.

One of the challenges is determining the role of offshore money, Wilkins said.

The data on the impact of foreign investment is “particularly poor, although some studies show that it is a factor in terms of adding to demand.”

She said the federal government, which committed $500,000 in the March budget to let Statistics Canada study the housing affordability phenomenon, is doing important work to find answers.

Among other key risks cited in the report is the possibility of a sudden sharp rise in interest rates, and the potential for economic weakness in China driving down commodity prices, and therefore hurting Canada’s economy.

© 2016 Postmedia Network Inc.



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