Is this going to be NYC?

OTTAWA—Low interest rates around the world are fueling a familiar threat of housing bubbles, and central bankers in a number of key economies feel powerless to stop them.

The problem is being acutely felt in Canada, where home prices are soaring even as the country’s energy- and mining-dependent economy slows. Sweden and Australia are dealing with similar surges in the value of homes, leading officials in all three countries to worry about the risk of a destabilizing bust.

In Canada’s hottest market, Vancouver, British Columbia, the benchmark home price rose by a stunning 32% over the 12 months ended in June, with a “typical” detached home now costing 1.56 million Canadian dollars (US$1.2 million), according to a Canadian Real Estate Association index. In Toronto, home prices were up 16% during the same period.

Those price gains in two of the country’s biggest cities are likely unsustainable, the Bank of Canada warned in June. Yet even as Bank of Canada Gov. Stephen Poloz worries about a potential bust, he said in an interview earlier this week that rising home prices wouldn’t prevent him from driving rates even lower if he believed that was needed to stimulate the economy.

But Mr. Poloz, whose bank has cut interest rates twice since January 2015, also acknowledged that Canada’s current ultralow rate environment is “absolutely” helping to fuel rising house prices and household debt.

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“The risks are clearly rising,” Mr. Poloz said, when asked if Vancouver’s and Toronto’s housing markets are in a bubble. “I just don’t know how big the risks are.”

Mr. Poloz is among the central bankers who are increasingly caught between supporting their economies and addressing financial threats.

Their dilemma gets at a key question in central banking: Should monetary-policy makers stick to their primary goal of controlling inflation, or do they also need to use their powers to stop emerging asset bubbles before they get too big? There is little agreement on the point even after the U.S. housing crisis showed the consequences of leaving markets to deal with such problems themselves.

“This is a kind of a shared issue,” Mr. Poloz said of the risk of housing bubbles. “Low interest rates is something we all have in common, and that’s going to cause these things to happen.”

Housing bubbles can do economic damage by pulling investment into a relatively unproductive sector of the economy and piling up debt that can quickly go bad when prices deflate.

The Reserve Bank of Australia warned in June that housing prices had begun to rise again after a May rate cut. Housing in Sydney, Australia’s largest city, is already among the least affordable in the world, and the Organization for Economic Cooperation and Development ranks Australia’s household debt among the highest for developed countries.

Yet the central bank held its interest rate steady at its policy meeting on July 5 and signaled in a statement that it may need to cut rates in the future. One reason is that inflation is running below RBA’s desired target, a predicament shared by its counterparts in the U.S., Europe and Japan.

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Australia’s bank regulator has tried to address the risks of a bubble by implementing tougher guidelines for lending to property investors in the past year, which helped cool the growth in prices.

Still, the OECD warned last month that Australia may be nearing a “dramatic and destabilizing” end to its housing boom.

In Sweden, rapidly rising house prices, fueled in part by 17 months of negative interest rates, also are generating concerns about the risk of a correction. Stockholm has become one of Europe’s hottest property markets, one where prices rose 14% last year. The country has introduced measures aimed at limiting risky borrowing, but they haven’t fully offset the lift from record-low interest rates.

Sweden’s Riksbank said July 6 that its original plan to start raising interest rates by the middle of next year would likely be postponed, after the U.K. vote to leave the European Union raised uncertainty about the outlook for global growth.

“When policy rates globally are very low,” Riksbank Gov. Stefan Ingves said in an interview, “it’s not in the cards for us to embark on a path which is radically different.’’

Mr. Poloz took over running the Bank of Canada in 2013, when predecessor Mark Carney moved to the Bank of England. Canada’s central bank held its key interest rate at 0.5% Wednesday, as it downgraded its economic-growth forecast in response to a weaker investment outlook and sluggish exports.

“The central bank is only doing their job, which is to try to keep inflation on target,” Mr. Poloz said in the interview. Weak growth since the financial crisis, he said, “has kept central banks in the game much longer than anyone would have expected.”

The central banker said rates are a blunt instrument that would require triggering a recession to slow down the housing market. Instead, he said, policy makers need to be responsible.

Canada has tightened housing-financing rules five times since mid-2008 to curb excesses. Earlier this month, the country’s main bank regulator issued a letter to banks calling on them to ensure adequate internal controls on mortgage underwriting, including properly verifying borrowers’ incomes.

Still, some economists suspect Mr. Poloz might consider cutting rates further were it not for the concern about housing.

“They’re really stuck between a rock and a hard place,” Bank of Nova Scotia economist Derek Holt said before Wednesday’s rate decision.

Mr. Poloz disputes that housing concerns are preventing more cuts. He said his goal is to make sure the economy stays on a good growth track. The problem isn’t rate cuts, he said, but their yearslong duration.

“Normally, it doesn’t last long. You know, you might have a year or something while interest rates are lower than normal,” Mr. Poloz said. “…It’s only when they last a long time that they begin to accumulate into something that is of concern.”

I remember shortly after the NASDAQ crashed Allen Greenspan was testifying to Congress about fears that the economy would tank. He said that their research had shown that people were not spending their stock market profits, but instead were refinancing their homes in record numbers and tapping their equity and then spending that instead. It scared the sh*t out out of me because I thought that was a sign that the real estate market would crash really hard as soon as prices stopped going up. Guess what happened?

Yup, New York City will be just like Ottawa, Canada.

At some point, even if debt is cheap, prices will outstrip ability to buy for most people as wages remain stagnant. It's kind of a dilemma for the central banks. If they raise rates, that could cause other economic damage.

CC, You have a point but the wages in any of the markets described in the article have not grown either. Vancouver is Chinese offshore money but others? That is why my question.

The difference today v 2007 , rates are low (understatement) however money is not easy to get. Also we are not seeing anything like NYC in most other housing markets, improvement yes. I also don't think you have that rabid irrationality as depicted in 'The Big Short" among today's homeowners around the country. This time around the economy remains stagnant for many, I think most homeowners are happy they can pay their mortgage each month. I don't think they're running out using HELOCS to buy stock, boats are vacation homes in Costa Rica.

Keith, Why would not price explosion upwards in NYC happen like it happened in the markets mentioned? I think the current market slow down (except for condos in $2.5k+ / sq ft range) is temporary as the rates will continue to be low for a while. The fed may go to 1% ish in 2017.

My comments addressed the idea that NYC (US) markets are not in a bubble in my opinion. Are some segments a bit frothy? Yes, for sure. RE price explosion in NYC, I think we have seen it, you know that better than most!

I always wonder why the Fed continues to justify continued easing by claiming that inflation is low. Their interpretation of 'inflation' blatantly excludes the outrageous asset inflation we've seen over the past 7 years...

We need to ease off this easing asap imo.

300, the cheap debt pushes it up to a point, until it can no longer be sustained by stagnant local wages or outside money demand. Once it gets to that point, the bubble will burst. Of course there are other factors like basic supply and demand. Once supply catches up and exceeds demand (as we see in NYC uber luxury segment now), the urgency to buy cools off, the market stagnates, and prices fall. Even in the affordable luxury segment now you are seeing supply catch up and new developments taking much longer to get their apartments into contract.

CCL, NYC is indeed full of supply at $2k+/sq ft. It seems that it will take another year or two to digest this and upcoming supply.

fyshert, Fed does not have any option as $ will get too strong and cause even more manufacturing job losses. 10 y low rate, which causes asset bubble more than short rates, is in large part due to foreign buying due to zero 10 y rates in many developed economies. Fed has no control over that. You just have to participate in the asset bubble for now. Housing bubble is flowing into inflation via increased rental prices slowly which tend to lag by a 1-2 years.

I like that Justin Trudeau guy. Good boxer.

300 Mercer:

1. for the next few months NYC real estate is likely to be supported by the fact that some thirteen
trillion dollars In world debt is now negative, including some corporate debt

2. that creates a tremendous interest in high yield assets, i.e., real estate yielding 2% or better
3. at first blush it would seem that today's bubble investors are fools

4. but if the implications of 30-40 year minus-zero coupon debt are correct, as some very smart people
believe, the U.S. and world will be entering a period of sustained deflation in which +2.0% appears
to be a grate return

5. although the world economic and U.S, domestic economies face the greatest headwinds
since George Washington ggave up his British Army pension to head an unfunded start-up,
the evidence remains inconclusive as between hyper-inflation and deflation

6. the only certainty is not to invest your life savings in real estate right now unless you
are resigned to premature baldness