Bank of Canada Governor Mark Carney’s patience with rising housing debt may be ending.
The Bank of Canada said yesterday it “may become appropriate” to begin raising its policy interest rate again after keeping it at 1 percent and extending the longest pause since the 1950s, saying record high household debt levels remain “the biggest domestic risk” to the economy.
Carney is signaling the potential for increases even as the U.S. Federal Reserve says it expects to remain on hold for two more years. Higher borrowing costs may cool off a housing market that has seen real estate prices almost triple in some Canadian cities over the past decade.
“Monetary policy should be considered as one of the tools you should use to cure the problem” of rising household debt, Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial Group, said by telephone. “Monetary policy is what is causing the problem.”
Carney has frozen his main interest rate since September 2010 on signs that a strong currency and fragile global recovery will restrain exports, while at the same time warning that rising household debts risk derailing the recovery if the housing market corrects suddenly.
Real estate markets in cities like Toronto and Vancouver, where prices have almost tripled over the past decade, have created a dilemma for Carney and Finance Minister Jim Flaherty: how to avert a bubble in overheated areas without triggering a collapse elsewhere and undermining the recovery.
Monetary Policy Report
“They recognize that as long as their policy rate is still encouraging this kind of behavior, the longer it runs, the harder it is to clean up,” said Tulk, chief macroeconomics strategist at TD Securities.
The central bank’s report is due at 10:30 a.m. today in Ottawa, with Carney holding a press conference at 11:15 a.m.
The Canadian dollar jumped as much as 1.3 percent yesterday after the central bank’s announcement, while two-year government bond yields rose 10 basis points to 1.33 percent, the highest since August, as investors bet Carney may increase interest rates this year. The difference between two-year Canadian and U.S. government notes widened to 1.06 percentage points.
The average sale price of a home in Canada has risen 98 percent over the past decade, and 35 percent since January 2009, according to data from the Canadian Real Estate Association. Canada’s household debt relative to disposable income was at 152.9 percent in the final quarter of last year, after touching a record 154.2 percent in the previous three months.
Carney has repeatedly voiced concerns about household debt since a June speech in Vancouver and has said that monetary policy could be used to address rising levels of household debt that threaten financial stability. He’s also said that such action is the last line of defense, as policy makers should look first to proper regulation and supervision to safeguard stability.
Flaherty has tightened mortgage rules three times since 2008, including by shortening the maximum amortization period for government-insured mortgages to 30 years from 35 years, and lowering the maximum amount homeowners can borrow against the value of their homes. Still, he has resisted calls to act again, citing his preference for the market to correct itself.
Vancouver, Canada’s third-largest city where condominiums are being sold for as much as C$28.8 million ($29.1 million), has seen average home sale prices fall by more than 8 percent since touching a record high of C$831,555 in May 2011. Realtors in Vancouver sold 30 percent fewer homes in March than a year earlier.
That correction hasn’t spilled over into other markets. Home prices in Toronto were up 11 percent in March from a year earlier, while the number of multiple-unit construction starts rose 50 percent in Ontario last month, according to data from Canada Mortgage & Housing Corp.
Flaherty on April 13 said he was “encouraged” that Vancouver real estate seems to be correcting, and the national housing market is “softening.” Toronto-Dominion Chief Executive Officer Edmund Clark said yesterday he predicts the country’s housing market will slow down.
“It’s obviously been a source of tremendous growth in our core Canadian banking business,” Clark said at an investor conference.
Charles St-Arnaud, an economist with Nomura Securities International Inc. in New York, said monetary policy also may be a less risky way to slow the housing market than regulatory measures that may trigger an abrupt correction.
“When you look at other solutions, it’s probably the one that has the less probability of causing the collapse of the housing market,” St-Arnaud said, adding the Bank of Canada can move ahead gradually with rate increases. “Interest rates are probably the best approach.”
To contact the reporter on this story: Greg Quinn in Ottawa at firstname.lastname@example.org