Bank of Canada considers slowdown at real estate market a “healthy” shift

According to the Bank of Canada Governor Tiff Macklem, growing interest rates will not affect the national economy negatively and may even lead to a “healthy” slowdown in the real estate market.

Following the release of the BoC’s annual report on financial stability, Macklem noted that housing price increases during the pandemic were unsustainable and caused vulnerabilities among new buyers who had to take on extremely high debts.

“The economy can withstand (even needs) higher interest rates,” – Macklem says. “Housing sector moderation would be healthy.”

The new report is the first comprehensive statement focused on risks to Canada’s financial stability since Macklem started tightening policy in March. As you know, the central bank has raised its key lending rate from 0.25% to 1.5% this year, and the rate is expected to go up to 3% by October.

Macklem’s remarks coincide with the BoC’s last week statement, in which officials didn’t express much worry about the influence of any sharp correction (prices decline) in the real estate market. However, he says policy makers are focused mostly on heavily indebted households that are facing more risk from higher borrowing costs and have less equity to withstand any strong price decreases.

The Bank’s report says Canadians who bought properties recently would be “more vulnerable” in case of a correction. Many households stretched their budgets to maximum in order to enter the housing market, which showed price growth by almost 50% since the pandemic has started.

“If the economy slows down sharply and unemployment goes up significantly, the combination of more highly indebted Canadians and high home prices will intensify the decline,” – Macklem says, noting that it may have “broad” consequences for the economy and financial system.

“We don’t expect such a scenario. Our goal is to provide a soft economic landing with inflation returning to a 2% target level,” – he said. “However, we need to watch and manage the vulnerability closely.”

According to the report, it’s “too early to tell” whether the latest decline in home sales and prices is temporary or “the beginning of a deeper, lasting drop.”

Nevertheless, the officials expressed some worry that investors interest supported by home price growth during the pandemic may change and intensify price decreases.

The BoC’s estimates show that the share of new mortgages this year provided to highly indebted households (with a loan-to-income ratio of over 450%) has exceeded pre-pandemic levels and reached new records.