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Top Business Stories: SocGen warns of 'localized bubbles' in Canadian real estate

Top Business Stories: SocGen warns of 'localized bubbles' in Canadian real estate

SOURCE:These are stories Report on Business is following Wednesday, Sept. 5, 2012.

Follow Michael Babad and the Globe’s top business stories on Twitter.

Bank warns on real estate
Société Générale believes Canada still doesn't have a handle on a frothy real estate market.

Senior foreign exchange strategist Sébastien Galy today cited the risks associated with a protracted period of low interest rates. This has, of course, been the case in Canada, highlighted again by the Bank of Canada's decision this morning.

As expected, the central bank held its benchmark rate steady at 1 per cent, where it has been for two years, and suggested the next move in rates would be up. The timing of a rate hike, however, is a complete unknown, with some observers suggesting we won't see one until late next year.

The Bank of Canada has been concerned about consumer debt, as has the federal government, which has moved several times to cool down the mortgage market.

Because the government acted, the central bank didn't have to. Or so the theory goes.

"The change of tone is likely to be subdued as the housing bubble is not yet under control and the BoC is starting to be under fire for its ultra loose stance," Mr. Galy said before the Bank of Canada statement.

Rates are low in Canada, he said, and a long time timeline can have "unintended consequences."

"Canada is tackling this risk by dealing with a known problem with administrative measures, such as countercyclical buffers in its mortgage market," Mr. Galy said.

"It is noteworthy that this housing and commercial real estate bubble is developing in Toronto, even with an ultra conservative financial system," he added in a research note, though he told me later that it goes beyond just Canada's biggest city.

"Commercial real estate in Canada is only a small fraction of that of the U.S. as they never went through a consumer-led boom. This suggests that the BoC will need to see the impact of the administrative measure to be reassured."

So Canada is now seeing "localized bubbles in some housing sectors," Mr. Galy told me, and he had some interesting observations.

"Administrative measures as adopted in China may well prove effective (change in mortgage rules), but they indicate an inadequate policy stance from the point of view of the internal equilibrium of the Canadian economy," he said.

"From an external point of view it is more justified given global risks, but that stance is similar to what many Asian economies would take in their choice between inflation and growth. In Canada, the CPI basket only gives a very partial impression of inflation, paying your rent gives a more vivid impression. This suggests that the BoC will tend to maintain a more hawkish stance than would be justified just looking at domestic economic prospects."

As The Globe and Mail's Kevin Carmichael reports, the central bank today did cite the uncertain global outlook, with a slow recovery in the United States, a recession in Europe, and slower-than-expected growth in emerging markets such as China.

As for consumers, by the way, the Bank of Canada noted "tentative signs" that spending is slowing, though household debt burdens continue to rise.