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Keeping a wary eye on the housing market

I wasn’t that worried about a Canadian housing price collapse, but if the Bank of Canada is worried, then maybe I should be.

No, no, don’t panic. Our central bank didn’t say it was inevitable or anything, in fact they didn’t say it was a probability even. They just called it a ‘risk.' And it was on the back page of the Monetary Policy Report, where you might not even see it.

I did see it though. I read all of the Monetary Policy Report (released on October 20th), every last word, because I was in the so-called ‘lock up’ for journalists (Put simply, you get to see the report early, then you are locked up so you can’t tell anyone about it ‘til its release). 

Let’s backtrack a bit.

The MPR, as it is not-so-affectionately known, is the Bank of Canada’s four-times-a-year look at where the economy is and where it is going. It’s typically released a day or two after our central bank announces a decision on interest rates. This time, of course, the Bank announced rates would stay where they were, particularly in light of all that is happening (or might happen soon, in the case of quantitative easing) in the United States.

The assessment on the economy was careful, maybe even grim. The Bank cut the forecast for Canadian growth to 3 percent this year (from 3.5 percent) and 2.3 next (from 2.9 percent). Growth zooms up 2.6 percent in 2012 – all things being equal.

So let’s get back to the “Risks to the Outlook” section. It’s exactly that, a list of things that could make all things not be equal.

We got the usual suspects: deflationary forces, disappointing productivity and all that.

But the housing remark was a bit more interesting. Here’s what they wrote:

“If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption, given the high debt loads of some Canadian households.”

Thing is, the housing sector in Canada has already slowed down, and in fact has slowed more than the Bank really expected. In fact, the Canadian Real Estate Association reports that sales were down nearly 20 percent in September 2010 compared to a year earlier. In fact, the Bank of Canada pretty much engineered the slowdown, between the three rate hikes we have seen this year, and the measures to stop speculation and slow the markets that they put in during the spring.

So what are they afraid of? That they have already gone too far?

Most certainly, what they are concerned about seeing is a sizable price correction. Sales volumes may be down, but Canadian housing prices have basically been stagnant over the past year.  

And, after all, one of the reasons that Canada did so much better than the U.S. during the downturn is that our housing market never corrected that much. Then again, when the world started to really slide, in 2008, Canadian were saving about 14 percent of their incomes. These days, Statistics Canada says it's more like 5.5 percent. 

So you can see why BOC Governor Mark Carney keeps making snarky comments about how indebted Canadians have become. What he sees is that if the housing market came down a bit, homeowners would be a touch more vulnerable than they were last time around.

Or a lot more vulnerable.  Or not. It’s hard to know just how worried the Bank of Canada is.

Thing is, if they bothered to put a reference to housing risk into the Monetary Policy Report, then they are watching the sector pretty carefully.

Economy watchers and investors would be wise to do the same.

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