Concerns have mounted over Canada’s hot-to-the-touch housing market in the last few months, with commentators fretting that a prolonged period of low mortgage rates and skyrocketing prices could lead to a problematic, speculation-driven market taking off.
Speaking to the Calgary and Edmonton chambers of commerce this week, Bank of Canada Governor Tiff Macklem acknowledged that there were risks that “housing prices could get stretched and households could get stretched” with interest rates expected to remain low until 2023 to support the economy through the pandemic recovery.
Although several media outlets focused on Macklem’s comment that there were “some signs” of the market overheating during the Q&A segment of the session, BMO economist Benjamin Reitzes wrote that the governor “didn’t sound too concerned” about housing in his comments.
Reitzes pointed out that Macklem said the signs the bank is currently seeing in the market are “not like what we saw in 2016 and 2017” when multiple government measures were introduced to cool down what was viewed as a runaway housing market.
While he believes the situation should be monitored “very closely,” Macklem also said that, at this time, the Bank of Canada is not recommending any new measures for the housing market.
A lot of weight is placed on the central bank governor’s opinion of the housing market, which is why these speeches are closely watched by financial institutions, economists and business reporters.
The Bank of Canada’s key interest rate, currently sitting at a record-low of 0.25 percent, is a major influencer of consumer lending rates, including mortgage rates. As the key interest rate rises, mortgage rates typically follow along with it, though there are other important factors that contribute to these moves.
The concern with keeping interest rates “low-for-long” is it will drive a run-up in home prices, with homebuyers and investors believing that prices will continue to rise indefinitely. This could result in buyers taking on too much debt and experiencing severe financial pain when interest rates do eventually rise.
Looking ahead, Macklem said that the Bank of Canada will be paying attention to growth in Canadian household debt and looking for signs of “extrapolative expectations,” defined as when people expect the significant price surges the market has experienced recently to go on in perpetuity.
