Austrian economists have been at the forefront of those critical of the easy money policies that the world’s central banks have undertaken to address the financial crisis. The Austrian view is that rock-bottom interest rates and excess liquidity threaten to ignite yet another bubble. The Bank of Canada, it appears, is progressively recognizing this danger.
In its semi-annual analysis of the financial system, released today, Canada’s central bank is counseling financial institutions to be cautious in their lending. This is because consumers are piling up dangerous levels of debt. They are falling behind on their loan payments at a higher rate than before the financial crisis. The percentage of vulnerable households (those with debt to disposable income ratios of 40% or more) has risen dramatically in the past year.
Much of the debt being assumed has gone into the Canadian real estate market which, in stark contrast to the US, has continued to gallop upward over the last few years. Canadian houses, as a result, are now hugely overvalued. If we look, as the Bank of Canada does, at the ratio of house prices to disposable income, it sits at 4.5. This is well above the 3.5 range it reached before the last implosion of the real estate market in the late 1980′s.
The Canadian banking system has been much praised for weathering the crisis better than other nations due supposedly to more stringent regulations. We’ll see if that holds up to a correction of housing prices. Then we’ll know for sure that lax regulation is not what gets the commercial banks into trouble. The fault will clearly lie with the Bank of Canada, just as an Austrian would expect.