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23 Oct

Bank of Canada raises red flags over Toronto, Vancouver, Calgary housing markets Add to …


Posted by: Jaime (James) Fleming

These are stories Report on Business is following Wednesday, Oct. 22, 2014.

Central bank cites housing
The Bank of Canada is raising red flags about the Toronto, Calgary and Vancouver housing markets.

Those are, of course, key markets in Canada, where real estate values differ widely across the country.

In its monetary policy report today, the central bank said housing activity “has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year.”

However, it highlighted big regional divergences colouring this picture.

Housing markets in eastern Canada “appear to show signs consistent with a soft landing,” given slower price increases and sales volumes.

“This contrasts with major cities in Ontario, Alberta and British Columbia, where housing markets are generally robust and much tighter,” it said.

“While a good part of the strength can be explained by favourable demographics and strong employment gains in parts of the country, it nonetheless suggests that household imbalances could increase further,” the central bank warned.

It did not cite specific cities. Nor did it say they were headed for trouble. Indeed, in an interview with The Globe and Mail’s Carrie Tait, senior economist Randall Bartlett of Toronto-Dominion Bank said the sky’s not falling.

Thus, I took it as a warning sign.

“Simply, this is the main reason the bank would be extremely reluctant to consider cutting rates (in a stress situation),” said chief economist Douglas Porter of BMO Nesbitt Burns.

“They have frankly been surprised at the underlying strength in housing and consumer spending, and now explicitly tie that to low interest rates,” Mr. Porter said.

“There is no more brave talk about a soft landing for housing.”

Over all, Bank of Canada Governor Stephen Poloz and his colleagues noted “renewed vigour” in residential real estate. They also noted stronger car sales.

“Housing activity has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year,” it said in the report.

“Housing starts have remained broadly in line with demographic demand in recent months,” it added.

“However, sales of existing homes have picked up noticeable since the beginning of the year, to a four-year high … This is contributing to sizable increases in house prices, although the national picture continues to mask important regional divergences.”

According to the Teranet-National house price index, home prices in Canada rose 0.3 per cent in September from August and 4.9 per cent from a year earlier.

Notably, Calgary, Toronto and Vancouver were well above the national average, at 9.5 per cent, 7.4 per cent and 6.5 per cent, respectively.

Just this week, Moody’s Investor Service also flagged concerns of Canadian home prices, warning the housing market and swollen household debt levels are a risk.

Mr. Porter noted the shift in the central bank’s tone over the past six months where housing is concerned.

“Earlier they were convinced (perhaps bravely so) that the housing market was on course for a soft landing,” Mr. Porter said.

“Now, they are openly suggesting that it has been stronger than they expected, and thus the associated risks with household debt ‘are edging higher,’” he added.

“The focal point of that ‘stronger than expected’ housing market has been in Calgary, Toronto and Vancouver, as we (and others) have noted. Most of the rest of the country is not seeing particular strength in housing.”

What’s important here is that the strength in various housing markets is “localized,” as Mr. Porter put it, and thus “broad” policy measures are not necessarily the best way to deal with it.

As in, “higher interest rates would hit all markets, including many cities that don’t need cooling.”

Remember that former Bank of Canada chief Mark Carney and the late Jim Flaherty, Canada’s finance minister at the time, each took measures as household debts got out of hand.

Mr. Carney threatened to raise interest rates, and Mr. Flaherty brought in a series of measures.

As The Globe and Mail’s Barrie McKenna reports, the Bank of Canada also held its benchmark overnight rate at 1 per cent today, bringing to more than four years its longest rate freeze since the 1950s.

The sudden drop in the price of crude has become a new wild card for the Bank of Canada, our Ottawa correspondent writes, knocking the wind out of inflation and delaying any move to hike interest rates.

The central bank said inflation risks remain “roughly balanced,” but it pointedly dropped the word “neutral,” a hallmark of its monetary statements for the past year. This comes after Mr. Poloz indicated he wants to move away from an explicit commitment on future changes to its key rate.

The most significant shift in the bank’s latest economic forecast centered on inflation, where the bank said that patchy global economy is pushing some prices up, while depressing others. There is strong growth in the U.S. and weakness virtually everywhere else in the world.

A news conference by Mr. Poloz, which was to have come later in the morning. was cancelled, as was a scheduled appearance before a parliamentary committee by Mr. Poloz and senior deputy Carolyn Wilkins.