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Bank of Canada expects less housing market sizzle

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Canada's robust housing market should moderate as demand is eventually dampened by higher interest rates and other factors, Bank of Canada Governor Mark Carney said on Wednesday.

In a speech in Vancouver, the country's hottest housing market, Carney warned that Canadians are now as deeply indebted as the Americans and the British, and the proportion of households that are vulnerable to an adverse economic shock is at a nine-year high.

Policymakers will need to remain vigilant to possible financial imbalances, he said. But he gave no clear signal the bank was prepared to raise its benchmark interest rates any time soon to address housing prices that are now 13 percent above their pre-crisis peak.

"The bank manages policy for the economy as a whole, rather than any specific region or sector. In this context, what does the Bank of Canada expect for housing? In a word: moderation," Carney said in the text of his speech.

"While supply of new homes should remain relatively flexible, many of the supportive demand forces are now increasingly played out," he said.

He repeated language in the bank's May 31 rate announcement that the current monetary policy stimulus—with rates of 1 percent—"will be eventually withdrawn".

Carney expects economic growth to slow to a modest pace in the short term on the temporary effects of the Japanese disaster and high energy prices, before speeding up again in the second half of the year, "consistent with a renewed narrowing of the output gap."

The eventual rate hikes will have a bigger impact on Canadian borrowers than in the past because of high debt levels, making homes unaffordable for more people.

Likewise, stricter mortgage lending rules imposed by the government will make it harder for buyers to use high debt levels to maintain demand for houses and pressure prices.

Carney also said a resurgence of mortgage borrowing in the first quarter may be temporary.

He suggested, however, that certain areas and segments of Canada's housing market were showing bubble-like characteristics, particularly Vancouver where the average home price is nearly 11 times the average household income.

"Given such developments, one cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate the underlying forces of supply and demand," he said.
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