Bank of Canada Policy Is “Too Loose,” Rate Hikes Will Reduce Real Estate Froth: BMO

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.



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  • SmugCanadian 2 years ago

    Our bank of Canada is too stupid to make their own decisions. Nothing will happen until the US pumps rates. Trust me!!

    • RM 2 years ago

      We tapered our bond buying before the US, so I wouldn’t be so sure.

      • BrainDrain 2 years ago

        Right, but BOC owns 40% of all outstanding Government of Canada bonds versus the Fed which only owns 18%. Canada’s QE in relation to market size was huge.

    • RBS 2 years ago

      As our 75% trading partner with a nuclear submarine fleet, I’m not sure how far we can diverge.
      Some at the bank of Canada seemed to think they were clever in do an end run around the Great Recession, but we’re increasingly finding out how illusory and ill-considered that is.

  • V 2 years ago

    I agree with the SmugCanadian, if the people who lead our country had real intelligence they would have done something months ago if not a year ago. The prices are unsustainable and causing people to flee cities for smaller ones and creating stress for new comers who need a place to live. Absolutely a horrendous disaster created by the Bank of Canada and policy makers.

  • Rene Albert 2 years ago

    Why did the bank of Canada wait so long??? Should have raised interest rates 2 years ago…

  • yak 2 years ago

    because they are idiots!!

  • Neo 2 years ago

    The only idiots are anyone who thinks this low interest rate policy wasn’t done on purpose or by design.

    • Sam 2 years ago

      What’s the end-game?….or is it just because lending institutions are breaking records because of mortgages and debt? …..ridiculously idiotic short-sighted greed?

      There’s room for some difference of intelligent opinion here…but I’d say overnight rates between 2-4 % affecting mortgage interest rates between 3-6% is good way to keep an economy in a sustainable healthy growth pattern. Affordable housing 20 years from now, commensurate with sustainable inflation. 0.25% to 1% has rendered the BoC useless….they’ve squandered their one effective tool. Now all they can do is QE and piddling with 1/4 percents…..

      The sad thing is, this was the situation before the pandemic. Transitory Inflation my rear-end! Every millenial or younger who will work hard only to find they will never be able to own a decent home just needs to cite tie Arya prayer every evening….”Poloz….Macklem….Trudeau…..Freeland…..”

  • gary 2 years ago

    Stop giving mortgages to investors. mortgage should be only given for principle residence. see how prices will be controlled immediately.

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