Bank of Canada Governor “Worrying”sign in Canada’s hot housing market to increase level of debt

Wednesday, March 31st, 2021

Mounting debt ‘worrying’ as Canadians stretch to chase rising home prices, says Bank of Canada governor

Bianca Bharti

 Bank of Canada Governor Tiff Macklem said he’s seeing “worrying” signs in Canada’s hot housing market, in which households are taking on increasing levels of debt to chase rising prices.

The central bank had largely stayed quiet on the housing market until February, when Macklem said it was showing signs of “excessive exuberance” as national real estate prices jumped 25 per cent from the year before.

“Since then, the housing market has continued to run strong across a variety of dimensions; price increases have continued at a pretty high rate,” Macklem said in an interview with the Financial Post on Wednesday.

“If you look at the household indebtedness, you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured space. That suggests that Canadians are stretching and that is worrying.”

The central bank and other authorities are facing mounting pressure to address the overheating housing market, which the Canada Mortgage and Housing Corporation warned last week is becoming increasingly vulnerable to economic shocks.

However, CIBC’s deputy chief economist Benjamin Tal warned that just because the housing market is hot, does not mean the central bank should act.

“That’s not his domain, that’s the finance minister’s domain,” he told the Post. “People have to understand that he will cross the line if he starts talking about microprudential policies.”

Macklem himself stopped short of suggesting a policy response is necessary.

What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in

Bank of Canada Governor Tiff Macklem

“From our perspective, monetary policy is a blunt tool. It’s a macro-economic instrument. We have to look at the whole economy. The whole economy needs monetary policy support to support the recovery, get people back to work and get inflation back on target,” he said.

Tal reiterated Macklem’s view.

“The housing market is one part of the economy,” he said. “As a society, we have never been so sensitive to the risk of higher interest rates…. Every small increase in the interest rate can have a significant impact on the housing market and therefore, (Macklem) would like to see the market slow down before we have to raise interest rates.”

While the market continues to rise, some of Canada’s biggest banks have been leading the calls for a policy response of some kind.

In a report on Monday, Royal Bank of Canada senior economist Robert Hogue said the near-term outlook for homebuyers is “grim.”

“Smaller markets are losing some of their affordability advantage, which adds stress to buyers willing to move to a different town to find a home they can afford,” he wrote.

Last week, Hogue said policymakers needed to address the “overheating” in markets as it threatens to destabilize the economy, suck money from more productive areas and exacerbate inequality.

Bank of Montreal senior economist Robert Kavcic, in a Tuesday report, said “policy makers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road.”

While the state of the market can be explained to some extent by a fundamental shift in demands, there are other factors, like speculation, at play, the governor said.

“What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in. There certainly are some signs of extrapolative expectations,” Macklem said.

“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”


© 2021 Financial Post

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