The ‘Responsible’ Canadian: Why Stephen Poloz Sees No Housing Crash

The numbers certainly support the Bank of Canada’s expectations for heading off a housing meltdown. The question is, how long will that last?

And the answer – who knows? – is one of the reasons central bank chief Stephen Poloz is still concerned.

As The Globe and Mail’s Barrie McKenna reports, Mr. Poloz appears to be more troubled by Canada’s export showing than by still-high consumer debt levels, but he nonetheless flagged it late yesterday when he spoke to the Commons finance committee. He’ll speak to a Senate committee today.

The Bank of Canada governor said he still expects a soft landing in residential real estate, and that the debt burden among consumers will continue to stabilize. According to Mr. Poloz, we’re more responsible now.

But, the “imbalances” in the housing market are still elevated, he said, which means Canadians are vulnerable should we see another economic shock.

“We are observing, anecdotally at least, an increased awareness of this risk,” Mr. Poloz said.

“Consumers are showing responsibility; for example, homebuyers who opt to buy less than they qualify for so they don’t find themselves overextended if interest rates rise,” he added.

“Banks, as well, are underwriting loans more carefully, ensuring that people can service their debts if rates go up. So, while the risk could be significant, we are comfortable that it is not outsized.”

Interest rates will, of course, rise at some point. But not anytime soon. And when they do, it won’t be too far too fast.

The latest numbers from Statistics Canada support Mr. Poloz’s anecdotal evidence.

The key measure of household credit market debt to disposable income dipped in the fourth-quarter of last year to 163.97 from the record 164.2 in the third quarter. The measure of debt servicing is also falling.

And like Mr. Poloz, economists believe borrowers have got the message.

But remember that this doesn’t mean we’re borrowing less, only that the growth in credit is slowing.

Also remember that we’ve been here before, taming our appetite only to see it rise again.

Go back two decades, to late 1993, when that measure stood at 91.06. A decade later, it stood at 116.4, and then surged unrelentingly, even through the recession.

It dipped here and there, only to bounce again. So Mr. Poloz has good reason for his caution.

Economy grows 0.2 per cent

Winter has taken its toll on Canada’s economy.

The economy expanded in February by just 0.2 per cent, shy of January’s pace, which in turn followed a winter-related dip in December.

Output in goods-producing industries increased 0.5 per cent in February, led by the mining and energy industries, while that of the services sector inched up just 0.1 per cent, Statistics Canada said today. Manufacturing climbed 0.6 per cent, a slower pace than the 1.6 per cent in January.

Canada’s economy had picked up marked in January as it rebounded from the icy days of December, but February’s weather appears to have kept things in check.

That growth of 0.2 per cent in February was about what economists had expected.

And, according to senior economist Krishen Rangasamy of National Bank, puts the economy on track for first-quarter expansion of about 1.5 per cent at an annual pace.

“We expect growth to pick up over the balance of the year in synch with a U.S. rebound,” he said.

The Bank of Canada forecasts average economic growth of 2.5 per cent this year and next, and then a dip to 2 per cent.

Source: Michael Babad @ The Globe & Mail

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