Canada’s monetary policy is too loose, and tightening is the simplest way to correct it. That’s the gist of the latest research note from the Bank of Montreal (BMO). Senior economist Robert Kavcic notes the current market is more frenzied than anything else in Canadian history. He sees Ottawa using a rate hike to cool it, which will help reduce demand. By reducing demand, he sees the market froth easing.
Canadian Home Prices Are Accelerating At A Rapid Rate
Today’s Canadian Real Estate Association (CREA) data shows soaring home prices. As stated earlier, the price of a typical home is now 26.6% higher than last year. It’s hard to believe, but recent growth has been even faster than usual. According to the bank, the 1, 3, and 6-month annualized growth rates were between 26% to 36%. Shorter-term price acceleration typically means faster annual growth rates are coming.
Canada Acted Quickly Last Time Home Prices Grew This Fast
The record home price growth is like nothing else seen in the country’s history. The national growth rate is at a record high, and this isn’t just a Toronto or Vancouver trend. The whole country is seeing home prices surge at one of the fastest rates ever. “This market is now running even hotter than early in the year and in early-2017,” highlights Kavcic.
Canadian Real Estate Price Growth Vs Interest Rates
The economist didn’t elaborate on that last point, but it deserves a moment. In 2017, home price growth was perceived to be a red alert, warranting the attention of the government. A series of tightening measures followed to reduce credit, and slow home sales. Non-resident taxes were rolled out and interest rates climbed. Right now? No level of government has commented on the current situation.
Policy Is Too Loose and The BoC Will Tighten To Reduce Froth
BMO sees the lack of public discussion as just a lack of public discussion. “No doubt Ottawa is piecing together a policy response as we speak, but sometimes the simplest answer is the right one: Rate hikes,” suggests the bank.
Adding, “The Canadian economy is now loaded with evidence that policy has been left too loose, and we suspect imminent BoC tightening will take some froth out of the housing market.”
Canada’s central bank has been tight-lipped about its next moves. The Bank of Canada last told the public that April would be the earliest they’ll be raising rates. That was back when they said inflation was transitory though. Since then, the US has dismissed the transitory narrative and Canada’s central bank has been quiet.
It’s anyone’s guess if and when interest rates climb. JP Morgan, America’s biggest bank, is forecasting a hike at the Bank of Canada’s January 26th meeting. Other banks see it occurring by March at the earliest — though most have said a hike to the overnight rate is long overdue.