Topping the list of Canada’s 99 concerns is it’s over $2 trillion in mortgage debt. Earlier today, Senior Deputy Governor of the Bank of Canada (BoC) Carolyn Rogers responded to worries over the country’s financial stability. She summed it up by focusing on two issues that have been around for a while but are mounting: consumer debt and the property market. She cautioned that homeowners may feel the effects of these measures over the next several months, but that they are important to bring the country’s markets back into equilibrium.
RESIDENTIAL REAL ESTATE AND CONSUMER DEBT ARE A MAJOR RISK TO CANADA'S ECONOMIC GROWTH AND STABILITY
When speaking about threats to financial stability, the senior deputy governor of the Bank of Canada zeroed primarily on consumer debt and housing prices. They stressed that neither issue is a recent development, pointing out that it has been discussed in central bank studies as far back as 2006. Despite the fact that no major catastrophe has occurred as of yet, growing systemic vulnerability is cause for alarm. What would have been a manageable problem in 2006 has ballooned into a major crisis because the Canadian economy is so dependent on the housing market.
Prior to the epidemic, Rogers said, there were serious worries about cost and investor speculation. Issues that had previously only been affecting Toronto and Vancouver became national crises as the pandemic spread. In most markets, home values increased by over 50% in just over two years. She noted that “housing activity,” measured by the number of homes bought and sold, was roughly 30% greater than pre-pandemic levels. An essential clarification, as this wasn’t a time of low activity that low rates were attempting to boost. The market keeps adding fuel to the fire of stimulation provided by historically low-interest rates.
FRONT-LOADING RATE INCREASES WILL LOWER RATES
The simplest approach to guarantee a larger inflation spike is to pump the gas while the economy is thriving. Inflation had already reached sky-high levels before the invasion of Ukraine. A crisis exacerbated the difficulty of moving slowly, making swift action necessary. In order to quickly calm the economy and keep inflation expectations anchored, we have raised interest rates significantly. said Rogers, “greater rises in the future can be avoided.”
She didn’t go into detail, but this is basic monetary policy. Inflationary pressures from interest rates will increase the longer it takes to raise them in an effort to rein in overheated demand. The resulting cycle of inflation and countermeasures is dubbed an “inflationary spiral” and is difficult to reverse. There are preliminary indicators that the monetary policy is having the desired effect, but we still have a ways to go until inflation returns to its target level. Sadly, there are unpleasant consequences to this transition. And we’re aware of that,” she said.
FOR AN ADEQUATE BALANCE, CANADIAN HOME PRICES MUST FALL
Canadian homeowners, especially those who were duped into assuming that current low-interest rates would persist for much longer, have been dealing with the aftermath. She pointed out that, while not a huge percentage of households, a larger than usual number had chosen to obtain mortgages with adjustable interest rates. Buyers today face interest rates that are substantially higher than they had bargained for, with interest eating up a growing portion of their original payments. Borrowers with fixed rates won’t feel the effects of rate hikes until it’s time to renew their loans. In a nutshell, property prices are going up significantly.
Furthermore, a toxic market has developed due to the excessive lending that initially boosted investor demand and housing prices. To return to her original point, the 50% increase in property prices has exacerbated the affordability crisis that prospective buyers were already confronting. It’s not only in major cities like Toronto and Vancouver; it’s happening all around the country. Today, the Bank of Canada (BoC) unexpectedly acknowledged that housing prices are technically overvalued and would need to fall.
The deputy governor has stated, “We need reduced house prices to restore balance to Canada’s housing market and make home ownership more attainable to more Canadians.” And he continued, “But reduced housing prices may increase stress for individuals who purchased recently. They’ll have less equity, which could make it harder for them to refinance.
The least disruption will be seen by short-term end users because they won’t be leaving their current role for a long time. However, there may be instant liquidity difficulties for investors who considered extremely immediate bets. Especially if they’re part of the pre-sale market and haven’t yet taken possession of the home they’ve purchased.
