Bank of Canada frets over hot housing market, indicates rate hike off cards

The Bank of Canada said on Thursday that Canada‘s hot housing market and high household debt levels had left the economy more vulnerable to economic shocks, but made clear it would not raise interest rates to cool the frenzy.

A housing market boom and linked rise in mortgage lending has helped buoy economic growth in the short-term, but they increase the risk over the medium-term, the central bank said in its annual review of financial systems.

Despite the intensifying risks, the focus remains on getting the hardest-hit segments of the economy through the COVID-19 crisis, Bank of Canada Governor Tiff Macklem said.

“We do factor housing into our monetary policy decisions but we do have to look at the whole economy … there are important parts of the economy that remain very weak and the economy needs our support,” he told reporters.

Macklem made his remarks when asked if guidance on rate hikes could change to deal with rising home prices. The Bank has signaled it will hold its key benchmark interest rate at a record low 0.25% until the second half of 2022.

But, in his strongest comments yet on housing, Macklem said recent price surges were “not normal” and eventually interest rates would go up.

“Some people may be thinking that the kind of price increases we’ve seen recently will continue. That would be a mistake,” Macklem said.

Canadian home sales and prices have surged in recent months, as demand has outpaced the available supply. The average price nationwide jumped 41.9% in April from the previous year, when prices inched down amid a pandemic plunge in sales.

The housing boom has led to a jump in mortgage debt, sending total household debt up sharply since mid-2020.

“The vulnerability associated with elevated household indebtedness is significant and has increased over the past year,” the bank said, adding the quality of new mortgage borrowing had deteriorated.

About 22% of all new mortgages have a loan-to-income ratio above 450%, the bank said. That is above the range seen in 2016–17, before Canada‘s financial regulator introduced mortgage stress tests intended to cut out risky lending.

On Thursday, the financial regulator officially made those stress test requirements tougher, a move Macklem said would be helpful. The new rules only apply to uninsured mortgages.

When asked about inflation, which rose at its fastest pace in decade in April, Macklem said expectations remain well anchored, but if they were to become unhinged the central bank would take it very seriously.

The bank said last month it expected inflation to rise to around 3% on temporary factors before settling back to the 2% target. The Canadian dollar extended its gains touching 1.2049 to the greenback, or 82.99 cents, after his comments.

(Reporting by Julie Gordon and David Ljunggren; Editing by Andrea Ricci, Aurora Ellis Kirsten Donovan)