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The Bank of Canada just laid out how the economy could tank

The Bank has taken to YouTube to warn Canadians about the dangers of too much debt and unrealistic house price expectations. Will anyone listen?


 
The Bank of Canada marker is pictured in Ottawa on September 6, 2011. The Bank of Canada will release its latest monetary policy report this morning -- a document expected to explore the economic damage inflicted by falling oil prices. THE CANADIAN PRESS/Sean Kilpatrick

The Bank of Canada marker is pictured in Ottawa on September 6, 2011. The Bank of Canada will release its latest monetary policy report this morning — a document expected to explore the economic damage inflicted by falling oil prices. THE CANADIAN PRESS/Sean Kilpatrick

In recent months the Bank of Canada has ramped up its warnings about heavily indebted households and the unreasonable expectations driving the housing market, yet all indications are that Canadians have stuffed cotton in their ears.

In Toronto, for instance, house prices are up nearly 15 per cent since the summer when Bank of Canada governor Stephen Poloz warned that price gains in the city were “difficult to match up with any definition of fundamentals that you could point to.” In the more than 15 years that the Teranet-National Bank House Price Index has tracked property prices in the city, there’s never been a six-month period when prices rose that fast. Meanwhile, the latest figures released by Statistics Canada showed the household debt-to-income ratio broke yet another record in the third quarter.

Now Canada’s central bank is trying a different platform to get its message across: YouTube.

In a video posted Monday on YouTube, in conjunction with the release of the Bank’s semi-annual financial system review last Thursday*, Bank of Canada senior policy adviser Joshua Slive sketches out how Canada’s dangerous brew of debt and inflated house prices could combine to devastate the economy.

Here’s the scenario that worries the Bank.

1. As the Bank has pointed out already, households are highly indebted and house prices are rising at an unsustainable rate, though as Slive observes, people can often cope with these vulnerabilities for an extended period.

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2. That is, until an economic shock triggers a negative chain of events. For instance, a severe recession would lead to “a sharp increase” in unemployment.

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3. A lot of households, especially those carrying the heaviest debt loads, would have trouble meeting their debt payments. As a result, some households would start to default on their loans, and in turn, banks and trust companies would foreclose and try to sell those houses.

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4. At the same time, with the economy slowing, new buyers would delay house purchases until the economy improved. Given the challenges already facing the economy, this could “cause a large drop in house prices.”

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5. If house prices fell, it would push down household wealth, which has received a huge boost from the housing boom, and that could curtail consumer spending, which itself has become a primary driver of growth. The added stress on the financial sector would also weigh on the economy as lenders cut back on making new loans. Slive doesn’t use the term, but what he’s talking about is a credit crunch.

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There is good news, Slive says. Stress tests show Canada’s big banks will be just fine even with a large drop in house prices. It’s also important to note that the Bank, in its financial system review, said there is a “low probability” of a sharp correction in house prices. But there’s no getting around the immense damage such a scenario would have on the economy.

The video is a break from regular fare on the Bank of Canada’s YouTube channel, which is largely made up of speeches by top Bank officials. And even if Slive’s delivery is trademark central-banker dry, the message is stark, and shows the Bank is desperate for Canadians to heed its warnings on debt and rising house prices.

If there’s one quibble to be made, it’s with the initial domino that the Bank sees setting everything in motion—a severe recession leading to job losses. Since the U.S. housing bubble popped and that country went into its long, dark funk, a chicken-versus-egg debate has raged over whether the housing collapse triggered the U.S. recession, or whether something else, like soaring oil prices, brought on the recession and turned the housing slowdown into a total collapse. What’s beyond debate is that America’s housing market reached its frothiest in mid-2006, and then began its decline, one-and-a-half years before the recession began.

Whatever the case, the Bank’s video should be another wake-up call for Canadians. Not that anyone’s listening. On the morning of Dec. 20, the video had little more that 600 views. (Update: Since this post was published, the number of views has jumped to more than 20,000.)

Here’s the video in full.

* This post has been updated to reflect the fact the video was released as part of the Bank’s financial system review


 

The Bank of Canada just laid out how the economy could tank

    • With people carrying massive debt, that would trigger the scenario Slive is talking about.

      • Yes, some people will get whomped…….it shouldn’t have been left so long…..but it will also raise investment money.

        • “Some people will get whomped”…..

          Many will get “whomped”. Many foreclosures will occur. Rents will rise for people who are already barely hanging on. Homelessness will ensue.

          Instead, make it far more difficult to get a mortgage. Look at our business taxation levels and ask why manufacturing is tanking when the dollar is low. Canada should be doing excellent in imports and in attracting business investment. With the dollar at this level, this a great country to open a business. Why is no one taking the bait? Could it be the price of electricity? Taxation? Are we a country that is unfriendly to business?

          • Yup, and just like that we’ll turn into Sjomalia. and you lot will all be happy.

    • Raise interests – why ? Is CAD/USD 1.35 too high? BOC will never raise rates willingly. However maybe at 1.72 or lower ? Watch the USD for clues as to when BOC’s hand will be forced.

      • Interest rates are low everywhere…not just here.

        Getting people to invest requires higher rates.

        The banks are fighting the wrong battle.

        • Getting people to invest requires capital. How would making capital more expensive by raising rates make people invest? How? Enlighten me. What am I missing?

          We do agree that the banks are fighting the wrong battle. The battle is named “Currency war”.

          • Go buy some GICs….or Bonds.

            This has nothing to do with currency

          • GICs and Bonds are non-productive instruments. How does moving from one non-productive instrument like Cash to another help investments that can spur an economy?

            My original question still stands. How does raising rates and making capital more expensive help?

  1. What is big discussed is already unfolding…

    At this time there is no way out, people can’t sel their homes to even break even on what the owe.

    The economy has been under water for at least 18 months. Government spending can’t continue and truth be told a 30 Billion Dollars in Government spending to stimulate the economy is just a quick way to burn tax dollars.

    Large scale corporation and all other smart investment has moved out of Canada. It doesn’t make sense to invest in Canada as Canada is no longer competitive. Labor, taxes, power, fuel and the list goes on.

    I love Canada and would love to see a reason for myself to invest here as I am Canadian but there is no sense. Our stock markets are not regulated, our government is weak and near sighted at best, and our economy has bandaged itself for the past 12 years with credit backed by artificial how easy equity loans.

    In my opinion, housing in Canada is over valued by 60% and of course that is my opinion as well as some well known foreign banks. If by chance the housing market droped 20%, I would boldly state that 80% of Canadian families would have a negative net worth.

    When the storm hits full force it’s going to leave Canada and Canadians completely broke and then the 20% with a positive net worth will be taxed so heavy that they too will be broke if they stay associated with Canada.

    • The preceding Con commercial is straight from their HQ folks. Fresh off the leadership race and fundraising drive.

      “nice hair though’

      Pssst: the world economy is in a mess……Canada is actually doing quite well.

      • Really? The US economy is in a mess and Canada is fine? Funny. Why then are their employment numbers and GDP good while our GDP contracted?

        For a supposed “investment professional”, you don’t seem to know squat, given how you constantly told us that Ontario was fine and the auditor general has told us Ontario is anything but fine. You are completely partisan. Anything you read that supports what you believe….that the Trudeau govt and Wynne govt are doing great…you embrace. Anything you read that says they are tanking, you deny.

        • The US is doing well too. And no one is ‘tanking’

          We are globalizing…….so things get a little chaotic as we join together..

          I’m not an ‘investment professional’. I’m a Global development consultant.

          • …”a little chaotic” you say. You are either the most optimistic “Global development consultant” or completely delusional. Of course given how many times you have denied any concerns with Wynne’s level of debt, the cost of energy in Ontario and other issues that plagued the McGuinty/Wynne governments, I believe you wear selective blinders. You didn’t even want to admit it when the auditor general’s report came out and Wynne apologized. I am an Albertan and I never deny our economy is in trouble or Canada’s economy is trouble. How is denial helpful?

    • Most people don’t understand that a federal government debt is a private sector asset. We actually need more of that to solve the private sector indebtedness problem.

      • Explain to me how paying more taxes to service a large federal debt is somehow an asset to the private sector. The Libs spent $30 billion on infrastructure spending and it didn’t stimulate our economy as our GDP contracted in the last quarter. Businesses don’t see Canada with its high cost of doing business as an attractive place to hang out their shingle.

    • If the housing market corrected itself by 20%, we’d see the housing market take advantage of lower prices and re-correct itself in 6 months, similar to what happened in Vancouver when the foreign real estate tax was introduced.

      Also, if the BoC saw this as such a huge problem, they’d increase interest rates.

  2. Bank of Canada Governor Stephen Poloz should send a copy of his warning Re: “Excessive Debt” to PM Trudeau and his Cabinet. After all they are adding thousands of dollars to each and every Canadian’s personal debt through our national debt.
    Of course, having the ability to print limitless quantities of fiat dollars means never having to say “sorry” or repay the debt… an advantage that Johnny Canuck does not possess, unfortunately.

    • Well none of that is happening, so relax.

      Go have some eggnog

    • Eleanor, if you are going to attribute government debt to individuals, than logically you must also attribute government assets. Then you get a different story.

      • Well the gist of Trudeau’s economic plan is to sell Canada off asset by asset to global 1%’ers with his privatization bank financed in part by our own tax dollars, and leave us with user fees and tolls on foreign owned assets.

      • Larry Kazdan:
        So all Canadians own all government assets. How great is that!! That makes each of us a multi-millionaire. Wonderful except for one minor detail: try to cash out on our share of the assets.
        It can’t be done. But the debt really does belong to us… and we pay the price for it every day in higher taxes.

        • So we own the debt but not the assets?

          Relax Eleanor…..no one is coming to your door with a bill.

          • “no one is coming to your door with a bill.” says Emilyone
            Are you kidding me?
            Maybe you don’t pay income tax, Emily, but I sure do… and quite exorbitantly, I might add.
            And as the national debt under the Trudeau regime over the next three years skyrockets, I fully expect my (and other taxpayers) tax burden will rise as well.

        • Taxes are quite low in Canada so stop whining, and be thankful you don’t live in Japan. LOL

          Canada has had a debt since day one…….we will always have a debt……it goes up and it goes down, but as long as the GDP is higher, we’re fine.

          If you want things like education and health and a variety of other goodies they have to be paid for. If you want to save money there are lots of things we can cut….but I’m sure you won’t like them.

          Do you ever think of anything else?

  3. People forget. Some younger Albertans have never heard of what happened in the early 80s.

    Remember when the IMF was after us?

    Kudos to Maclean’s for the reminders!

  4. Who is controlling the housing market?
    Rich immigrants form China, India and the Middle-East.
    Welcome to corrupt Immigration Canada.

    • It’s called capitalism, dumbass……and just because you can’t afford housing is no reason to insult immigrants.

      Your family were immigrants……remember?

  5. It’s called “financial engineering” they planned it this way the government and the banks are in collusion setting everyone up for the biggest transfer of wealth in Canadian history. They can’t wait to create a crisis then enact their newly created “Bail-In” legislation in order to get at the responsible savers to pay off all of Bay Streets gambling debts, where do you think all that toxic debt went from 2008 ?, it’s still lurking around in some excel spreadsheet somewhere. It’s all about privatized profits and public losses just like Greece where they went in and took 22% of everyones cash right out of their bank accounts with an option to take another 33% over and above the 22%. So your thinking ohhh no but I know the CDIC guarantees me $60,000 deposit protection that’s where your wrong. Bail – In legislation has fundamentally changed the relationship between you and your bank deposits, in the contract between you and your bank every time you make a deposit that money becomes the “banks money” if the bank goes bankrupt you will be standing in line as a common creditor trying to collect 2₵ on the dollar on money thats held in “reserve”

    • Sounds like you’ve had an entire bottle of bad scotch.

  6. The cheap money the BOC provides (with the overnight lending rate being close to 0 at 0.5%) has caused these economic bubbles we see primarily in the stock market and the soaring housing prices.

  7. You should have stopped after the ellipsis because the first part of the sentence is correct. When you issue your own currency you can never become insolvent so worries about the public debt are unfounded. Private debt is quite another matter and too much of it is very bad indeed. Pursuit of balanced budgets amid large current account deficits means as a matter of accounting that the private sector is becoming increasingly indebted. This cannot persist. The solution is counter-intuitive to most but we need to run even higher federal deficits to counter the spending leakages and rebuild private balance sheets.

  8. Bank of Canada will not raise interest rates “willingly”. They will be forced to do so in order to defend the CAD. Watch the US Fed and the 10 year yield for clues as to when this will happen. Real question is – how low a loonie is BOC willing to bear before mounting a defense ?

    Hard times are coming. No sympathies to anyone neck deep in usury. Real estate agents and speculators are on notice.

    1. Advice to new home buyers – Wait for a monstrous price correction. Continue to rent in the meantime.
    2. Advice to home sellers – Rush for the exits. Party is over.
    3. Reminder to those in denial – Eventually the wolf does come. And each day of so called “doom and gloom warnings”, is a day closer.

    Merry Christmas and a happy new year to all.

  9. They go on about the people of Canada and how the economy could tank but no mention about the debt of our country and the amount Junior is borrowing from foreigners. If the country goes belly up then we will be in the position Greece was right?

    • No, because none of that is true.

  10. Wrong, unfortunately, and here’s why:
    1 Canada has its own currency;
    2 The only source of Canadian dollars comes from the federal government acting through its central bank.

    Once you admit these uncontroversial facts, fears most have about the public finances fall away:

    1 Revenue raising. Since the federal government has a monopoly over the issue of Canadian dollars, it is not financially constrained. It can buy anything priced in CDN dollars, immediately. Just “use the computer” to markup the bank accounts of whoever is offering a good or service. With this sovereign buying power there is no need to raise Canadian dollars from any other source and absolutely no justification for borrowing Canadian dollars from anybody.
    2 Insolvency. Since the government can create as much money as it needs to pay for any expense, there is no risk of the Canadian government ever going bankrupt.

    The real concerns are then real and not financial; our focus should be on maintaining full employment of all resources at all times. By worrying about public debt and deficits, millions go without and we guarantee less for our grandchildren.

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