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Bank of Canada governor Mark Carney says while international investors increasingly view the Canadian dollar as a safe haven, that new status should be used for productive purposes, rather than fueling the overheated housing market.
Carney says the recent move by the Canadian dollar to above parity with its U.S. counterpart is a sign of the strength of the Canadian economy compared to the rest of the world.
“There’s an element right now of a safe haven premium for the dollar -- there are relatively few places in the advanced world that investors can put there money with a degree of certainty that something catastrophic is not going to happen,” Carney says in an interview with CTV’s Lisa LaFlamme in London.
But he warns that the real test is how the Canadian economy uses its new status as a darling among international investors.
“Our challenge as a country is how do we use that capital that comes in? We can use that to grow our economy and invest in new productive assets in industries, or we can build houses -- and our view is that we should do the former,” he says.
Carney has repeatedly warned about the country’s booming housing market and high consumer debt levels. In his last interview with BNN in December, Carney took to encouraging Canadian households to strengthen their balance sheets.
"We're not at some magical threshold for Canadian household debt, but the time to adjust is before you get to some threshold," he said at the time. "The market will sometimes let you get beyond the limit for some period of time and then the constraints come and the adjustment is much more difficult."
He added that the country’s corporate sector should step up to carry the torch of economic growth, which has been borne by consumers since the 2008-09 financial crisis.
"They have balance sheets that are in fantastic shape, as good as they've ever been. And they have a financial sector, which we're telling them is going to be there in good times and in bad," he said at the time.
But Carney now believes that many consumers, particularly in the housing market, are beginning to heed his message and warnings from other top officials, such as Finance Minister Jim Flaherty.
“An adjustment is beginning in the Canadian housing market and that’s in part because of messages that have gone to individuals and to the institutions. It’s in part because of steps taken by the bank regulator OSFI to encourage banks to increase capital faster than they otherwise would, and it’s in part because of measures that the federal government has taken to tighten mortgage insurance rules,” he says.
But he also doesn’t rule out additional steps, saying that the central bank “will take them” if required.
In June, Ottawa announced a number of changes to government-backed mortgages.
The new regulations shorten the maximum mortgage amortization period to 25 years from 30 years and lower the amount homeowners can borrow against their house to 80 percent from 85 percent. They also limited taxpayer-backed mortgage insurance to homes that sell for less than $1 million and capped the gross debt service ratio of a mortgage to 39 percent and the maximum total debt service ratio to 44 percent.
The rule changes come after many economists warn that the country’s real estate market is set for a pull back after years of climbing prices and growing consumer debt levels.
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Carney also had a message for Canadian businesses: It’s time to focus on tapping fast-growing emerging markets such as China.
“China is at the top of the list in terms of who is moving forward the most rapidly,” he says. “The United States is still the largest economy in the world and it’s still an incredibly dynamic economy, but our message to Canadian business is that it is not the economy it once was. It is big but it’s more a question of gaining market share in the United States now as opposed to participating in a big dynamic economy such as China or…other major emerging markets like Brazil.”
Carney adds that currently only 9 percent of Canadian exports go to “fastest growing economies in the world.”
In 2011, Canada exported more than $330-billion worth of goods to the U.S., which continues to be the country’s largest export market. Exports to Canada’s second largest trading partner, the UK, totaled $18 billion in 2011.
Exports to China, meanwhile, totaled just $16 billion last year.