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Housing 'the elephant in the room' as Bank of Canada decision looms

ANALYSIS: A generation of Canadians crying foul over unaffordable home prices shouldn’t count on the Bank of Canada to ride to the rescue any time soon.

Governor Stephen Poloz wields a fairly blunt instrument when it comes to reining in housing – the overnight target rate. Still, the bank recognizes its loose monetary policy has played an important role in fueling the Vancouver and Toronto buying frenzies.

In February, the benchmark price for all residential properties in Metro Vancouver soared 22 percent year-over-year to $795,500. In the Greater Toronto Area, the average price jumped 15 percent to $685,278.

RBC called both markets “increasingly (dangerously) unaffordable.”

Poloz will make a rate decision this coming Wednesday, and many economists say rising interest rates will be the real test for these housing markets.

So with the Bank of Canada and the federal government projecting a soft landing for real estate, will Poloz pull on the lever at his disposal to help get us there?

Low interest rates are supporting domestic demand and appetite for debt, the lion’s share of which is mortgage debt.

The central bank’s rate policy has also seen the Canadian dollar fall dramatically in the past 12 months. That, effectively, puts Canadian real estate on sale for foreign buyers snapping up high-end properties in the hottest markets.

“Eventually (housing) will be a factor prompting the Bank to begin raising rates, probably in 2017,” Doug Porter, chief economist at BMO, told BNN in an email. 

However, Porter warns housing alone won’t keep the BOC on hold if “other factors argue for another rate cut.”

“While the Bank is concerned about rising household debt and potential financial stability issues, they have made it amply clear that they view monetary policy as the last line of defence on that front.”

The housing market is the “elephant in the room” for the Bank of Canada, says CIBC deputy chief economist Benjamin Tal.

“To the extent that the recent improvement in the value of the dollar will lead to a situation in which the bank will start considering a rate cut, the real estate factor will be a strong reason not to cut,” Tal told BNN in an email. 

“After all, by cutting again the bank is running the risk of fueling an already red-hot market. And we have reached a point in which the benefit of a rate cut is probably smaller that the potential damage of such a move.”

Bank of Canada deputy governor Lawrence Schembri acknowledged the bank’s role in Canadians taking on record debt levels, but made it clear in a speech last month the central bank views itself as that “last line of defence.”

“Although we have the flexibility to choose a different path for interest rates to restrain the accumulation of household debt and mitigate vulnerabilities in the financial system, we have focused on attaining the two per cent inflation target,” Schembri told an audience in Guelph, Ontario, on Feb. 24.

“We believe that there are other measures, including public policies and private remedial actions, better suited to targeting and reducing these vulnerabilities than monetary policy.”

But what if monetary policy and government intervention aren’t the prescription for cooling overheated markets?

Emanuella Enenajor, an economist at Bank of America Merrill Lynch, says Canada’s housing excess is a regional story that interest rate policy can’t address.

And government macroprudential policy, Enenajor warns in note to clients, is a dangerous way to cool things off, “as they would hurting housing markets that are weakening, like Alberta.”

That said, the new Liberal government has taken its first steps toward cooling the market. As of February 15, homebuyers must put down ten percent on the portion of the home purchase price over $500,000. The amount under that still only requires a five percent down payment.

There was some speculation that February’s sales numbers would surge as buyers rushed into the market ahead of the change and then trail off in the back half of the month.

The Toronto Real Estate Board says that just wasn’t so.

“Sales were up strongly from the 15th day of the month onward as well, despite the new federal mortgage lending guidelines coming into effect,” TREB president Mark McLean said in a release this week.

Even a modest rise in interest rates, the Toronto board argues, would do little to derail the housing market.

Why? Too much pent-up demand.

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