http://www.theglobeandmail.com/repo...-stays-positive-about-housing/article1773964/
Carney stays positive about housing
JEREMY TOROBIN
OTTAWA— From Wednesday's Globe and Mail
Published Tuesday, Oct. 26, 2010 6:59PM EDT
Last updated Tuesday, Oct. 26, 2010 7:31PM EDT
Bank of Canada Governor Mark Carney is still concerned that home prices could drop more sharply than expected and exacerbate the growing debt burden of many households – but he doesn’t see it as very likely.
Speaking to the House of Commons finance committee Tuesday, Mr. Carney said the slowdown in housing is unfolding as the central bank expected it would, given the tighter mortgage rules brought in by the Finance Department earlier this year and the fact more Canadians are retrenching after spending and borrowing with abandon amid record-low interest rates.
Still, he warned, a quicker, less measured drop is a possibility. Should that happen, it would almost certainly mean Canada would see slower economic growth than Mr. Carney’s latest forecasts, which included downgrades for five consecutive quarters.
“One of the important downside risks to our projection is the possibility that there is a more abrupt correction in the housing market than we’re anticipating,” Mr. Carney told lawmakers at the panel hearing in Ottawa. “We’re not forecasting an abrupt correction, but it is a possibility, given two factors: the speed with which house prices rose and, secondly, the absolute weight of debt in the economy that is tied to housing.”
The housing market’s descent from the loftier levels of late last year and the first three months of 2010 has been a key driver of the economy’s shift from one that was the envy of the Group of Seven six months ago to one that grew at a meagre 1.6 per cent annual pace last quarter and which will take more than a year than previously thought to return to its full potential.
On one level, the housing slowdown was expected and even welcome, since it suggests fewer Canadians are gorging on cheap credit and taking out big loans they won’t be able to handle as interest rates creep back up to more normal levels. The demand for homes that was spurred by rock-bottom interest rates pushed the market into overdrive last year, sent prices soaring and powered the domestic rebound until exports started to recover.
The flipside is those purchases fuelled what Mr. Carney often refers to as “front-loaded growth.” Buyers rushed into the market to get ahead of interest rate hikes, as well as things like the tighter mortgage rules that took effect in April and the harmonized sales tax that came into force in Ontario and British Columbia in July.
Now that consumers have tapped out their ability to take on debt, fewer are buying homes or any other big-ticket items.
That’s why, in theory, home prices could fall more rapidly, which in turn would cause a sharper slowdown in consumer spending because so many Canadians’ actual and perceived wealth is tied up in their homes.
The Bank of Canada’s benchmark interest rate could remain at the current 1 per cent for several months, as policy makers wait for the crucial U.S. economy to start improving before raising borrowing costs on this side of the border.
Raising Canadian rates while the U.S. Federal Reserve is still on hold could send investors who want higher yields to currencies like the loonie, making life harder for exporters.
Mr. Carney told the parliamentary panel that if sudden moves in Canada’s exchange rate with the U.S. dollar or ``persistent strength’’ in the loonie got to the point that they posed a serious risk to the economy, he and the federal government ``maintain considerable options’’ to get the situation under control ``if that is necessary.”
I note the title of the article and the content don't follow. If anything, he is warning the downturn may be worse than expected.
We better hope there is not too much of a downward correction because the spiral could get very nasty. I still appreciate this is a theoretical argument and I am sure there are those who say by publishing this in papers will in fact make it happen and that the newspapers are responsible for the "correction" if it occurs.
However, the chorus just keeps getting louder. Those who ignore it do it at their own peril.
