James Flaherty on the housing market

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Jesse posted a letter in the forum that he sent To his MP and James Flaherty supporting changes to government support of Canadian housing markets. Evidently a few others wrote in as well, because Jesse posted Flaherties response, which was duplicated in a PDF we received from another reader. You can read the full response in the forum post, but here are a few key sections we thought were interesting:

…we are encouraging responsible home ownership through measures to help first-time home buyers.

Does assisting someone to buy something encourage responsibility?

Unlike the citizens of other countries, such as the United States, Canadians did not face mass foreclosures on their homes, and our banks did not require taxpayer bailouts due to turmoil in the housing market.

Didn’t the taxpayer backed CMHC pump un unprecedented amount of money into Canadian mortgages?

Third, we withdrew government insurance backing on home equity lines of credit (HELOCSs). Taxpayers should no bear any risk associated with such consumer credit products. These risks should be managed by the financial institutions that offer these products.

Agreed! So why were helocs ever government insured?

Those were just a few points that jumped out to me, anyone else spot anything remarkable in that message that you agree or disagree with?

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bubbly
bubbly
9 years ago

@jesse: The direct effects (on assets selected by Fed) would be the same – relatively higher prices and lower yields.

But some other consequences would be different. The important factor to consider is credit. Inflation/deflation is determined by money+credit.

– If credit is decreasing, then any increase in money supply via QE must first counter the deflationary effects of collapsing credit before it can cause any visible inflation. Remember, QE is not creating new credit. It's a direct injection of new money into the system through asset purchases.

– If both, money and credit are increasing, the inflationary effect is multiplied.

jesse
9 years ago

@bubbly: Thought you might find this interesting. This is discussion on FOMC plans to withdraw QE in the coming months (and years)

http://www.calculatedriskblog.com/2011/05/fomc-mi

jesse
9 years ago

@bubbly: OK. So what would the effects on yields of a QE program be in another time period, like, say 2005 or 1998? Why did the Fed make it abundantly clear they are planning on withdrawing QE when economic conditions improve?

bubbly
bubbly
9 years ago

@jesse: Your “all else equal” statement is not correct because it ignores the other side of the trade, which cannot be separated from the discussion. I disagree. If you want to see a direct effect of a policy you must first isolate it (in theory) by leaving all things equal. Now you may argue that reality is not that simple, and I agree with that, but that was not my point. Again, what would happen if the Fed didn’t perform QE? QE increases the money supply and counters the effect of decreasing credit. Let's imagine that QE and bailouts never happened. There is a good chance that with the collapse in credit, the malinvestments of the preceding period would be liquidated. Chances are that any sideline cash would seek safety in government bonds and thus push yields down. Actually, that… Read more »

jesse
9 years ago

@bubbly: My argument is that the effects of QE won't be universal depending upon the underlying economy. If an economy is expanding quickly the effect of QE on yields can be different. In the current situation they will lower yields but that is not universal, which is why the Fed explicitly committed to unwinding QE when conditions improve.

Anyways good discussion.

jesse
9 years ago

@bubbly: Your "all else equal" statement is not correct because it ignores the other side of the trade, which cannot be separated from the discussion.

Again, what would happen if the Fed didn't perform QE? Would yields be higher because the money supply is less?

bubbly
bubbly
9 years ago

@jesse: In terms of the suppressing rates argument, ask what rates would do without QE, and why QE wasn’t in common parlance before 2008 — why isn’t QE used when interest rates are higher. Why should it be used when rates are higher? Are low rates always desirable? No because the other side of the trade is also important: the cash sitting on banks’ balance sheets. Now if banks choose to do nothing with that cash then yes, for a brief time during the Fed’s purchase activity, bond yields fall. If banks immediately turn around and do something with their newly-acquired cash, that’s inflationary and drives up yields. That does not make sense at all. Just because the banks do something with the money, it does not mean that the bond yields will go down. That's not how it works.… Read more »

bubbly
bubbly
9 years ago

@jesse:

"all other things equal" – do you know what that means?

and this:

"It does not necessarily mean that the yields will be lower than they were before. It only means that they are lower than they would be without QE"

jesse
9 years ago

@Devore: "but not necessarily driving interest rates higher"

This is the "pushing on a string" argument. The government is having a difficult time generating economic output. The magnitude of QE is often overstated because, as you mention, banks don't do much with the money when they get it. Recent QE purchases are akin to increasing engine output in high gear by flooring the gas pedal.

In terms of the suppressing rates argument, ask what rates would do without QE, and why QE wasn't in common parlance before 2008 — why isn't QE used when interest rates are higher.

Devore
Devore
9 years ago

@jesse: I agree it is inflationary (in the sense that it increases the money supply), but not necessarily driving interest rates higher. Depends on where the money goes. (Primary dealer) banks aren't putting their cash into bonds, they're flipping them to the fed. They're quite clearly putting their money into equities, commodities and derivatives.

jesse
9 years ago

@bubbly: "ll other things equal, this results in lower yields. It’s a mathematical inevitability."

No because the other side of the trade is also important: the cash sitting on banks' balance sheets. Now if banks choose to do nothing with that cash then yes, for a brief time during the Fed's purchase activity, bond yields fall. If banks immediately turn around and do something with their newly-acquired cash, that's inflationary and drives up yields.

bubbly
bubbly
9 years ago

@jesse:

What’s the definition of QE?

A central bank's policy to increase the money supply by buying assets (mostly government bonds) with newly created money.

All other things equal, this results in lower yields. It's a mathematical inevitability.

I already wrote that in my previous comment.

Spec
9 years ago

@Boombust:

FYI: Garth Turner will be on The Morning Edition (CBC radio) tomorrow AM. All that is needed is for the seed of doubt to grow just a bit for the ruse to be up. Combined with other media attention, the doubt may have legs….

jesse
9 years ago

@Patiently Waiting: Re Vancouver at average affordability. Never mind that Seattle is much cheaper now than 5 years ago. I'm sure their affordability looked great in 2009 based on low interest rates. Did low rates then stave off price drops? Nope.

jesse
9 years ago

@bubbly: "QE, by definition, must push yields down."

What's the definition of QE?

specialfx3000
specialfx3000
9 years ago

@curious lurker:

Not as updated as Paul's numbers but this shows the proximate Sales.

Dailies – List | Sold

Vancouver East & West*

New Listings – 80

Back On Market Listings – 2

Price Changes – 27

Sold Listings – 52

Vancouver All Areas*

New Listings – 231

Back On Market Listings – 7

Price Changes – 120

Sold Listings – 130

*Attached & Detached – Date: 05/17/2011 Time:17:42 Pacific YatterMatters.com: Courtesy REBGV. Data believed to be accurate but is not guaranteed.

Best place on meth
Best place on meth
9 years ago

@ripper:

V886553 4859 WESTLAWN DR

V886229 5951 HALIFAX ST

bubbly
bubbly
9 years ago

@jesse:

Mr. Yield Curve disagrees.

QE, by definition, must push yields down. The central bank buys bonds with newly created money and thus contributes to demand (significantly) which in turn increases prices of these bonds and that results in lower yields. No way around it. It does not necessarily mean that the yields will be lower than they were before. It only means that they are lower than they would be without QE (all other things being equal).

Patiently Waiting
Patiently Waiting
9 years ago

On the CBC evening news, Tsur presented a graph about affordability. He said that over the past few decades it has, on average, cost about 77% of household income to make a mortgage payment (or something to that effect) and, due to the low interest rates, we are at the average now.

A couple of things came to mind:

– he never explained the difference between buying when prices are low versus buying when rates are low.

– families have increasingly become two income over that period.

No link available and I am a bit foggy about the details.

jesse
9 years ago

@bubbly: "QE is pushing the bond yields down"

Mr. Yield Curve disagrees.

Keeping An Eye On Th
Keeping An Eye On Th
9 years ago

Jesse, Vancouver homeowners will eat their young; greed is an incredibly powerful force.

These people are not the noble “Philosopher King Types”

The Vancouver Housing Bubble, will pop for economic reasons and no other.