Canada Needs Lower Home Prices & Economic Stability Requires “Pain”: Bank of Canada

Canada’s got ninety-nine problems and mortgage debt is…. Over two trillion of them. Bank of Canada (BoC) senior deputy governor Carolyn Rogers addressed concerns about financial stability earlier today. She boiled it down to two major concerns that have been present for a long time, but are building up — household debt and housing. She warned the coming months can mean some pain for homeowners, but it’s necessary to restore balance to the country’s markets. 

Canada’s Financial Stability Threatened By Home Prices & Debt

The BoC senior deputy governor focused on two specific areas that present financial stability — household debt & home prices. They emphasized neither problem is new, and the central bank’s reports have mentioned these issues as far back as 2006. A lack of disaster so far doesn’t mean it’s not a concern, but the exact opposite—the vulnerability is building up in the system. What could have been a minor issue back in 2006 is now a very large issue, as housing consumed Canada’s economy. 

Rogers explained there were significant concerns about affordability and investor speculation prior to the pandemic. When the pandemic hit, issues that were primarily between Toronto and Vancouver spilled out across the country.  

“Over the course of less than two years house prices went up by more than 50% in most markets. And housing activity—the number of houses being bought and sold—was about 30% higher than pre-pandemic levels,” she emphasized.  

An important point, since this wasn’t a period of weak activity that low rates were trying to stimulate. Low rates stimulated activity stronger than normal, and the market kept pumping the gas on more stimulus. 

Front Loading Rate Hikes Will Reduce How High Rates Will Go

Pumping the gas while the economy is booming is the easiest way to ensure inflation surges higher. We had significant inflation prior to the invasion of Ukraine, which sent it into the stratosphere. Moving slowly was compounded by a crisis, forcing the need for immediate action. 

“We have moved interest rates up quickly because history tells us that front-loading rate increases gives us the best chance to cool the economy quickly and keep inflation expectations anchored. This avoids the prospect of larger increases down the road,” she explained. 

Though she didn’t elaborate on this point, it’s textbook monetary policy. The slower rates are hiked when trying to cool excess demand, the higher the risk of interest costs being incorporated into inflation. It results in something called an “inflationary spiral,” where inflation and its attempted mitigation measures create a cycle that’s hard to break. 

“We have a long way to go to get inflation back to target, but there are some early signs that monetary policy is working. Unfortunately, this adjustment is not without some pain. We recognize that,” she warned. 

Canadian Home Prices Need To Fall To Restore Balance

Canada’s homeowners have been dealing with the fallout of this, especially those misled into thinking rates will be low for longer. Not a large share of households she noted, but more than typical have opted for variable rate mortgages. Those buyers are now paying rates significantly higher than expected, with interest now swallowing most of the payments. Fixed rate borrowers aren’t immediately impacted by higher rates, but they’ll be facing higher costs at renewal. In short, homeowners will pay a lot more soon. 

At the same time, the excess credit that helped boost investor demand and home prices has led to a toxic market. Circling back to her initial point, homebuyers were already facing a lack of affordability, compounded by a 50% increase in home prices. Not just in Toronto or Vancouver, but right across the country. Technically, home prices are going to have to come down, and surprisingly that’s what the BoC said today. 

“We need lower house prices to restore balance to Canada’s housing market and make home ownership more affordable for more Canadians,” said the deputy governor. Adding, “But lower house prices may add stress for those people who purchased recently. They will have reduced equity, and this may limit their options to refinance.” 

Short-term end users are likely to experience the least pain, since they won’t be exiting their position for years. However, the investors that entertained very immediate positions can face immediate liquidity concerns. Especially if they’re in the pre-sale segment, and have yet to actually take hold of any housing they’ve committed to buy. 

14 Comments

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  • Reply
    richard 7 days ago

    the boc infuriates me. they are the direct cause of the pain now and what is coming. they are without any integrity at all when they now turn around and tell us what we have to do to weather that pain is truly a disgrace. not for a moment taking responsibility for the decade long free money which created the bubble in the first place. i would argue economists are quite possibly the most dangerous people on earth and should be treated as such. their historical track record speaks for itself. lest we forget is something they never understood.

  • Reply
    george 7 days ago

    “We need lower house prices to restore balance to Canada’s housing market and make home ownership more affordable for more Canadians,” said the deputy governor.

    I hope this will happen as a first time buyer fricking waiting for 16 years to buy my first home. However, seeing the video of Tiff 2 years ago promising lower rates….BOC has lost a lot of credibility.

    At the same time our selfie leader wants to bring 2 million immigrants and good luck to them qualifying for anything in this country at the current salaries and house prices which are still higher than pre-pandemic years when they were high enough already…maybe they do want lower prices, who knows? sorry for my rant

  • Reply
    CramerShamePropaganda 6 days ago

    This article ignores the influence of foreign money, or at least plays it down severely. Canada doesn’t really Have financial borders, so foreign money needs to be considered in these calculations.

    • Reply
      Kate 6 days ago

      You can stop with the xenophobic narrative. Most immigrants coming over have less money than Canadians.

  • Reply
    Jim 6 days ago

    Finally, someone tells the actual truth.

  • Reply
    Average Man 6 days ago

    Ok. But when do people start losing houses? I want the distressed sales to start.

    • Reply
      gaga 6 days ago

      Not going to happen. Most people are locked into fixed rate mortgages. Demand is still high for housing too. Those that can’t afford will list and sell and at current inventory levels the new inventory would be welcomed and scooped up by those waiting for nicer homes to hit the market. In the end prices have pretty much bottomed and will likely stay relatively flat for the next few years.

    • Reply
      J 6 days ago

      Slowly rolling 2017-2022 >>> 2022-2027 >>> the carnage starts around 2024/2025. It will depend on inflation and BoC rate during those times.

      • Reply
        Mike 6 days ago

        Is that because about half the 5 year fixed come due in 2024/2025?

        I can honestly say I am not worried, but still slightly concerned about my payment change when my 5 year fixed comes due in mid 2024. If I feel the concern when I owe less than half of what my home remains worth today after the drop, I can only imagine what it will feel like to many others.

  • Reply
    Another average man 6 days ago

    me too buddy, me too

  • Reply
    Jack Frechette 6 days ago

    when home and auto sales collapse (the drivers of Canada’s economy) interest rates will come down. Home prices I believe will go up, and you can be sure will also. The higher interest rates will have left many Canadian’s
    poorer.

  • Reply
    JB 6 days ago

    My personal best guess is that prices won’t crash, instead there will be more corporations and hedge funds that become landlords and go as cutthroat as they possibly can. “Permanent capital” is going to bid out regular people. It’s a great investment for them since they can pay cash (not pay interest – the worse interest rates get the better it is for them) then turn around and create predatory extractive rental agreements that squeeze maximal money out of people who need a place to live and can’t afford to buy. Their monthly return on investment will be excellent, and those extractive profits will impoverish a lot of renters.

    • Reply
      Average Man 6 days ago

      Well, we know what we need to do when that happens. These REITs have listed addresses.

  • Reply
    J 4 seconds ago

    You increasing interest rates for past 6 months so aggressively has brought down inflation how much? Ever wonder why?…Because the cost is passed on to the average Joe…and you take that cost as the price that determines the inflation % again… And what will happen when you dont increase it?stupid experts.

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