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More on BOC housing market risk speech

The BoC release a speech on Monday with a significant portion dedicated to the housing market:

This speech reminds us several times that rate policy is to be used to control inflation, and that housing is only one factor of many that affect inflation. Unfortunately the speech glosses over that housing is the sole factor affecting inflation currently, and how low rates have contributed to housing being the sole factor driving inflation.

“As Canada’s economic growth moves towards its potential, it is expected that a robust housing market, supported by exceptionally low interest rates, will continue to work as an important engine pulling the Canadian economy out of recession. This has implications for monetary policy, which, as I’ve said, aims to achieve the Bank’s inflation target of 2 per cent over the medium term. It’s important to remember that this target is symmetrical; that is, we are equally concerned about whether inflation is above target or below target – as we expect it to be until 2011. The revival of the housing market is one factor that is helping us to achieve our inflation target, and it is a powerful means through which monetary stimulus affects the economy. Of course, we need to keep a close eye on the housing market, along with all other sectors of the Canadian economy, to ensure that we are providing the right amount of monetary stimulus. In setting monetary policy, we view housing – or the exchange rate, the energy sector, the auto industry, or any other factor – through the prism of our inflation target.”

The speech then reiterates a previous comment from Mark Carney, that the BoC should not be managing the risk of financial institutions:

“An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks. These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance, and a variety of other measures. These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions.

Using these instruments to safeguard the whole financial system – not just individual institutions – is the essence of the macroprudential approach. Macroprudential supervision is one of several concepts in a current global initiative to strengthen supervision and regulation in the wake of the global financial crisis. In Canada, a system-wide, or macroprudential, approach is the shared responsibility of the Department of Finance and all of the federal financial regulatory authorities, including of course the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation. Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

Now Carney has officially passed the buck to Flaherty to cool the housing bubble. What remains to be seen is how Carney will reach target inflation
without housing being the sole factor if Flaherty does implement the proposed changes to cool the housing market. The BoC had predicted GDP growth to return to normal by now, yet the numbers are far less than predicted.

Oh, lastly this wonderful quote:

“Using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase, the simulation generates a scenario indicating that, by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks.”

In 2 years if the BoC does nothing, 1 in 10 of us are in trouble. Thus why the BoC is taking the opportunity to pass the buck now.