Bank Of Canada Governor Sees ‘Worrying’ Signs In Housing Market

The Bank of Canada is seeing “worrying” signs that some Canadians are taking on too much debt to buy into the nation’s hot housing market.

In an interview with the Financial Post, Governor Tiff Macklem said there is evidence that loan levels relative to home values are growing — an indication that some borrowers could be overextending. He also warned people have begun to make purchases based on the belief prices will continue rising.

“Canadians are stretching and that is worrying.” Macklem said. “If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

At the same time, Macklem indicated the central bank can do little given interest rates need to stay low to support the recovery.

Extrapolative Expectations

63% of Canadians see home prices rising over next six months

Note: *Respondents answering they expect an increase when asked: “In the next six months, do you believe that the value of real estate in your neighborhood will increase, stay the same or decrease?”

Among policies being suggested are taxes targeting speculators like the one implemented in New Zealand this month, or an end to the longstanding and popular tax exemption for capital gains on primary residences. Another idea getting attention is the elimination of blind bidding for homes that some analysts say unnecessarily inflates prices.

Both Kavcic and Hogue also identified a lack of housing supply as a major driver of the recent run up in home values.

Prime Minister Justin Trudeau’s government plans to introduce a tax on foreign non-resident home owners. Finance Minister Chrystia Freeland said last week she is watching the market closely, without detailing any specific intent to take additional action.

Last week, Canada’s national housing agency added three more cities to its list of markets highly vulnerable to a sharp price drop, including Toronto. Canada Mortgage and Housing Corp. also said the recent broad-based price appreciation means overheating risks are now a national phenomenon, rather than isolated to a few major metropolitan areas.

– Bloomberg