Bank of Canada warns consumers of 'early indicators' of the housing market overheating
For now, the governor will hold rates low but sees signs of 'excess exuberance' in the economy.
Bank of Canada Governor Tiff Macklem, amid early signs of overheating in Canada's housing market, has so far no plans to increase interest rates until the economy and jobs are back on track following the COVID-19 recession.
Speaking remotely to the joint Chambers of Commerce in Calgary and Edmonton on Tuesday, Canada's top central banker said the economy will continue to require monetary support, possibly until 2023, although there are already indications that the residential real estate market may be distorted.
There are threats in that low-for-long world that housing could get carried away, so that's something we're going to be looking at very carefully,"In that low-for-long world, there are risks that housing could get carried away, so that is something we will be looking at very carefully,"
Some analysts have already voiced fears that the Canadian housing market is rising at an unsustainable pace, making critics fearful of a boom, including some in the real estate sector, followed by a catastrophic bust once interest rates inevitably begin to rise.
The most hard-hit women and young people
However, though Macklem also expressed concern, he said that while the bank predicts that the economy will start to grow by the end of this year, high unemployment among the most disadvantaged groups in Canada means that the economy will continue to need a helping hand.
"Because women and youth hold so many of the jobs in the hardest-hit sectors, they have borne a disproportionate share of the job losses," Macklem told his audience, adding that many of the jobs that have vanished will not return.
Already, long-term unemployment is currently kept at more than half a million people, a level not seen in the economy in 30 years, measured as individuals who want to work but have not found a job in more than 26 weeks. "labour market scarring."labor market scarring.
Although the bank keeps rates at rock-bottom prices, he indicated that employers in his audience need to contribute in exchange by helping to train the types of workers they need. That is particularly true in the digital economy.
Low-salary workers have been hit hardest. The demand for tech staff has not only bounced back to levels higher than before the COVID-19 pandemic hit, not only did technology-related jobs not fall as fast. And he said that workers in an economy that is increasingly digital and automated would help build their own workforce.
"Technology is no longer a sector," Macklem said. "It's every sector."
But he said that it will be a process of months and years to restore the workforce and the economy in that new form, and he reiterated that there is little fear of inflation and so there is a rate of increase because there is still a lot of slack in the economy.
Look out for extrapolative expectations
But just as low rates have contributed to higher loans from corporations that have helped spur growth and share prices, low mortgage rates have made it easier for prospective homeowners to compete for house prices.
So far, Macklem said, the move to larger houses farther away from city centers was not so much speculation as the need for more space for workers who no longer have to drive to the office to work and learn. Part of the evidence for that is that value rises in bigger, more remote houses, while inner-city properties draw less buyers and tenants.
However, there are indications that the practical impetus for increasing prices which change to the kind of speculation frenzy seen in 2016 and 2017 that the government tried to quell with tax measures and stress tests, some of which were relaxed last year.
"What we get worried about is when we start to see extrapolative expectations, when we start to see people expecting the kind of unsustainable price rises we've seen recently go on indefinitely, and they're basing their decision on those kinds of assumptions," he warned.
And while Macklem did not explain what kind of steps he would take to stimulate employment without over-stimulating housing, he said the bank would keep a close eye on the housing market and consider how to contain a housing bubble that could lead to future problems.
"When we see people starting to buy houses solely because they think prices are going to go up, that is a warning sign for us," he told the crowd. "We are starting to see some early signs of excess exuberance."