By Larry MacDonald, November 2, 2012
I'm starting to get scooped now. For the longest time it seemed as if I was the only one foolhardy enough to questions the doomsters' viewpoints on the Canadian housing sector. Now others are beatingh me to it.
For example, I was set to write about how Statistics Canada's 164% household debt-to-income ratio isn't as dire as many have protrayed it. But then others came out with critiques on why such worries are overblown, my favourite hailing from Gluskin Sheff economist David Rosenberg.
Next, I thought of warning housing bears to be "careful what you wish for," as many were not just predicting tumbles of 30% ot 50% in house prices, but expressing a desire to see them fall that much so they or others could buy a house. But CIBC economist Avery Shenfeld released "Be careful what you wish for," warning policymakers not to overdo the attempt to cool off the housing sector because the Canadian economy could as a result take a major hit.
Media articles reporting on these analyses immediately attracted a deluge of negative commentary. (It's almost as if the bearish cabal has sentinels that monitor the media for heresy and, when spotted, an all-points bulletin is sent out to fellow travelers to inundate comment sections.)
I can't understand why there is such a fanatical element in favour of an extreme setback in housing given the widespread trauma it would inflict. Shenfeld's article warning about the adverse macroeconomic impact of a housing bust was brief, but there are a number of other points worth mentioning. Here are five of several that can be made, as inspired by a September speech by the Federal Reserve Bank of Boston's Eric S. Rosengren:
1. Collapses in house prices often lead to prolonged, and even chronic, retrenchment in the economy, employment, and wealth generation - as the experiences of the US and Japan demonstrate. Housing typically leads the broader economy into a self-sustaining recovery, but severe price declines throw a spanner into the monetary stimulus of lower interest rates, for extended periods of time blocking them from sparking a housing sector revival, and, in turn, the economy.
2. The blockages are diverse. For example, low interest rates fail to help homeowners with negative equity in their house. They can't refinance to lower rates, so end up carrying above-market rates on their mortgage debt. As a result, no income is freed up for spending.
3. Another source of the breakdown in the transmission of monetary stimulus is a reversal in the "wealth effect". When the latter is decimated, so is consumption, the dominant expenditure category in GDP. Home equity is also a source of funds to finance startups or invest in other enterprises. If it is vaporized, a major engine of job growth and innovation is stalled.
4. Housing is a major asset on the balance sheets of consumers and finanical institituions If it is substantially devalued, the risk of financial crisis escalates. The US went to the edge of the precipice but pulled back just in time. If it were to happen in Canada and the rescue effort was fumbled, things could turn out a lot worse than what happened in the US.
5. Policies that are enacted to stave off depression and promote recovery come with an immense price tag. The integrity of the monetary system is seriously degraded by the immense amounts of money that have to be printed, and governments are forced into running huge deficits and dramatically increasing their debt loads. The bills will have to be paid in some way, some possibilities being the hidden tax of higher inflations, cutbacks to government programs, more onerous tax burdens and so on.
Surely there are better ways to deal with the problem of high prices in housing other than incurring such risks and costs? Some may recall there was another time within living memory when the call to diquidate was answered. That was when President Hoover responded to Andrew Mellon's call to "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate." The result was the Great Depression of the 1930s.
Canada's modern day Andrew Mellons may be able to buy their house cheap during the best they envision and promote, but it will be small comfort compared to what everyone will encounter on the employment, income, consumption and other other fronts.