David Rosenberg on the Canadian Housing boom and the V-shaped recovery
David Rosenberg has been pretty bullish on the Canadian economy. In the wake of recent tightening of regulations on housing in Canada, he muses about what this will mean for the Canadian housing market and the broader economy.
Based on our statistical work, around half of the 7% annualized growth rate in nominal GDP from the recession trough has been due to the combined direct and indirect benefits from the housing boom. And, when we apply the price deflators to the various sectors of GDP, we actually find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector. In other words, if not for housing real GDP would have stagnated since Q2 2009 instead of rebounding at a 3% annualized pace.
Now that we have ascertained the root cause of this economic revival, it pays to assess what the driving factors were behind this real estate surge. No doubt the Bank of Canada’s move exactly a year ago to cut the policy rate to a mere 25 basis points was a huge factor — not to mention the pledge to keep the rate low through mid-2010. And, knowing the expiry date, a tremendous amount of housing activity was brought forward as a result.
The aggressive move to ease CMHC guidelines was equally stimulative. For a good while, Canadians could secure a microscopic interest rate with a 40-year amortization mortgage with practically no money down. What a great deal! The government announced some tighter rules a few months ago, but like the Bank of Canada’s pledge, the new CMHC guidelines did not begin until now, so again activity was pulled forward. This impact of “borrowing activity from the future” will likely be accentuated by Ontario’s and B.C.’s move to harmonize their sales taxes with the federal government this July.
So the housing market in Canada, the goose that laid the golden egg for the broader economy, is now going to be operating without the crutch of massive government support. It will be fascinating to see how this all plays out, especially since so much housing demand has already been filled by all the frenetic activity over the course of the past year. With all of the real growth in the economy since last summer being derived from the residential real estate market, it’s legitimate to ask: who exactly will be picking up the baton. After all, federal fiscal policy promises to be a drag next year — the restraint from Mr. Flaherty’s recent budget will squeeze real GDP growth by 125 basis points next year, just as the lagged impact from the coming Bank of Canada rate hikes will be exerting their greatest effects.
Clearly, Rosenberg is pointing out that the Bank of Canada was giving out free money last year and that underwriting standards for residential mortgages had slipped dramatically (see Bubblicious mortgage deals, Canadian version). That has now changed. The question is what will it mean for the Canadian housing boom and the broader economy.
For his part, Rosenberg sees obvious parallels to the Federal Reserve’s easy money policies in 2003-2004. He believes the Bank of Canada is concerned.
The Bank will never say this publicly for obvious reasons, but my sense is that it is as concerned over a housing bubble just as I am and feels the need to nip it in the bud. I supported the Bank’s accommodative monetary policy of the past year and strongly believe that Mr. Carney and his senior team are as good as we’ve ever had. But like the Bank, I am totally blown away by Canada’s V-shaped recovery and the housing bubble’s role in shaping the bounceback. I wonder aloud whether or not the Bank now wished it had begun the process of taking the punchbowl away from the housing market six or even nine months ago (the benefit of looking through the rear view mirror).
Does that mean rate rises are coming in Canada? If not, expect more froth in housing, with the obvious nasty consequences on the way down.