Thursday, 6 December 2012

G&M: Bank of Canada issues harsh warning on condo market

GF: The self-reinforcing "Financial Decelerator" risk that was discussed here 3 days ago - now BoC is expressing similar worries.


Bank of Canada warns on condos
The Bank of Canada issued a harsh warning today about overbuilding of high-rise housing, notably condos.
“In the current context, a specific concern is that the total number of housing units under construction has been increasing and is now well above its historical average relative to the population,” the central bank said in its financial system review.
Today, as The Globe and Mail’s Barrie McKenna reports, the Bank of Canada again voiced in concern over the vulnerability of consumers to “economic shocks,” such as a housing bust or a spike in unemployment.
“If the upcoming supply of units is not absorbed by demand as they are completed over the next 18 to 36 months, the supply-demand imbalance will become more pronounced, increasing the risk of a sudden correction in prices”
That, in turn, could pressure house prices in general, which itself would spread through the broader economy.
“This would likely lead to a decline in housing activity, adversely affecting household incomes
and employment, as well as confidence and household net worth, which would in turn reduce household spending,” the Bank of Canada said.
“As the declines in incomes and employment impair households’ ability to service their debt, loan losses at financial institutions would likely rise. These effects may be amplified by tighter borrowing conditions as lenders come under increased stress. These interrelated factors would further dampen economic activity and add to the strains on household and bank balance sheets. They may also cause house prices to fall below the level required to correct any initial overvaluation.”
From my post in comment section on Dec 3:
I wanted to add in Consumer confidence, which I suppose is tightly associated with most of the above factors (income/unemployment/debt level/macro factors). While searching for articles linking consumer confidence with housing price, this article popped up high on google's search result list:Self-reinforcing effects between housing prices and credit - Evidence from Norway
Mostly over my head, even more so at 2am, but managed to read the conclusion. Looks like it's describing the "self-reinforcing" cumulative effect of credit and housing prices (formation of bubble), and how consumer confidence is a major variable determining short-term home price movements.
That led me to wonder, if multiple negative factors (credit tightening, income stagnation, unemployment, high debt, poor national/global econ outlook) coexist, perhaps a self-reinforcing cycle of RE-depreciation and further-decreased credit availability will emerge in Canada - unless the government steps in to break the negative cycle (not likely in near future as reducing household debt level seems to be Flaherty's main goal)..
2013 might very well be the year for the self-reinforcing "financial decelerator" to kick in, a.k.a "bursting of a bubble"..

1 comment:

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