The Economist Who Cried Wolf

Craig Alexander, chief economist for TD Bank feels like he’s the little boy who cried wolf.

“I have repeatedly warned Canadians to be careful with their finances because interest rates are bound to rise eventually,” he writes.   But things turned out differently.   He admits,  ” I said that at the start of last year, and interest rates ended the year lower.”

You may recall reading this blog last summer as we tracked when the banks thought the Bank of Canada would rise the overnight rate and how often dates were changed and pushed back.

Mr. Alexander believes higher interest rates will come, but this will now be coupled with other real estate dampening developments:

 Higher interest rates are poised to arrive at the same time that chartered banks are pursing tighter lending policies consistent with new regulatory guidelines, both of which will act to lower personal debt growth and dampen real estate activity. Of course, there could be a rush to buy, but this will pass.

Ultimately, moving the timetable for higher interest rates forward adds to our conviction that home sales and home prices are headed for a correction in 2013. The main point is that while the Bank of Canada is aiming to maintain price stability, the outcome will be a gradual leaning against personal debt growth, and this will have economic consequences.

TD’s chief economist reminds us that “the wolf does show up at the end. Well, the Bank of Canada’s messaging this week suggests that the wolf is getting closer and there aren’t too many pages left.”

Read: “Perspective: The Wolf is Getting Closer

That which must not be named

How many different ways can you describe a  “bubble”?  You can add the phrase, “valuations are extremely firm.”

In an interview with CBC radio today, Bank of  Canada Governor Mark Carney was asked if Canada was experiencing a housing bubble.

He replied:

“There are issues, particularly in some parts of the country in the condo market, without question, where activity has been particularly strong, has reached back to levels of the late 1980s.

And in some of our major cities, without question, valuations are extremely firm, to put it one way. And so some caution is warranted in that environment.”

Carney did not mention specific regions or cities but did say that interest rates “are going to go higher,” and Canadians should make sure they can carry that debt when interest rates “are at a more normal level.”

The wolf is getting closer…

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