June 2013


Is Japanese money printing supporting Canadian housing?

Global monetary easing appears to be firming asset prices              

Canadian residential real estate prices strengthened last month, despite continued projections of a soft landing or outright declines.


According to the Canadian Real Estate Association, the average price of homes traded via its Multiple Listing Service rose 3.7 percent to $388,910 in May. Housing starts for their part increased to 200,178 in May, up from 175,922 in April, at a seasonally adjusted annual pace, according to the Canada Mortgage and Housing Corporation. Strong job creation no doubt accounted for much of that strength, as have low interest rates, which continue to drive demand.


However while the Canadian economy, which added a stunning 95,000 jobs in May, has been doing alright, the fact that its residential real estate sector has held out so well, compared to those in other major western markets, remains a conundrum.


According to one well-known investor, part of the reason may relate to quantitative easing programs put in place by the US Federal Reserve Board, the Bank of England and more recently the Bank of Japan. According to Anthony Boeckh, president of Boeckh Investments, unlike conventional central bank monetary policies, which have brought short term policy rates to near zero, QE programs seek to bring down medium to longer-term interest too, through the purchase of longer dated assets. The process has been likened to printing money.


“There is a lot of money in the system tight now,” said Boeckh, during a recent presentation at the Montreal Economics Institute. “When that happens it has to go somewhere.” Many have worried that global QE programs would generate inflation. However Boeckh sees asset bubbles as an equally likely outcome. There are substantial indications that he may be right.


For example US, Canadian and Japanese stock markets now increase or decrease in lock-step not only with central bank actions, but also when even minor officials, such as regional Fed chairman, utter pronouncements regarding policy directions.


Although Canada’s central bank has not made any QE asset purchases, those in other markets, such as Japan, which announced a massive program earlier this year, also indirectly push down rates here.


The fact that bonds are now paying nearly nothing in interest, practically forces investors who want returns, to buy stocks and other risky assets, which are trading at significantly high valuations relative to existing risks in the system.


That may well apply to Canadian housing prices too, which although experts say they are not in bubble territory, are nevertheless trading at historically high levels relative to rents and incomes.


That said, global central banks are dealing with challenges that they regard as more serious than the threat of asset bubbles. As Valerie Poulin, president of the Association des Economistes Quebecois notes, existing quantitative easing programs, were put in place to help local economies (most of which are struggling far more than Canada’s) and to avoid possible deflation.


The problem is that no one knows how long this increasing money printing can go on. All we know is that despite the fact that recent efforts are getting larger, they are producing smaller results. Fortunately expert forecasters in the IMF, monetary policy authorities and bank economists, are taking the situation in stride, arguing that if enough easy money is printed, that global economies will find enough strength to grow on their own.


Let’s hope they are right.






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