Bank of Canada’s former Governor doesn’t think rate increases will change the housing market trends

Real estate in a city’s centre will always cost more, as residents from other areas have to waste more time to travel across the city.

“Yes, it’s that simple,” – Stephen Poloz, former Governor of the Bank of Canada, says.

“How can we solve this problem? Of course, there may be several options, but supply is the main reason,” – he noted, adding that Canada’s population is expected to keep growing and, as a result, intensifying the real estate market issues.

Although he admitted that “extremely low interest rates will push housing prices higher,” the possibility of a rate increase in spring will hardly solve the national problem.

“It will affect the equation, but it will not influence the tendency direction,” – Poloz said.

His speech follows the BoC decision to keep its key lending rate at 0.25%.

“With the ongoing inflation growth, an almost full recovery in employment markets, active housing sector, and a well-behaved currency, April does look like the starting point for an increases cycle,” – BMO chief economist Douglas Porter said.

During Poloz’s own tenure as the central bank Governor, he raised the rate five times between 2017 and 2018 after Canada had faced 7 years of no increases.

He also spoke about inflation concerns as the annual inflation rate went up to 4.7% in October, according to Statistics Canada.

According to Poloz, certain observers may confuse inflation with price normalization amid COVID-19’s emergence.

As an example, he told about his last public speech before the pandemic, when he stayed at a Toronto hotel for $449 a night. When he came back in November, as the pandemic was affecting the tourism segment, the price at the same hotel was down to $149 a night.

And when he arrived there a few weeks ago, the price rose to $300 a night.

“Holy cow. That’s a lot of inflation, right? Let’s write an article about it,” – Poloz joked.

“It’s normalizing. These prices went back up. They fall and then they rise.”

However, he did admit that other legitimate sources of inflation are within the economy, caused by such factors as supply chain issues.

As a rule, an overnight rate increase cools demand for real estate, while access to cheap credit brought by a rate decline usually raises markets activity. In 2020, Poloz said that household debt resulting from strong housing activity remains “Canada’s largest financial-system vulnerability.”

The BoC’s key lending rate was 1.75% before the pandemic and then it was cut to 0.25% by March 2020 in attempt to keep the economy alive during the pandemic.