Macklem not worried about a housing bubble
Economy can survive downturn, BOC governor says
Bank of Canada Governor Tiff Macklem isn’t worried about the country’s hot housing market, saying low interest rates and demand for space rather than speculation are behind the price gains.
Accommodative monetary policy, a preference for more living area and the ability to work from home during the pandemic are the main reasons demand for single-family homes across the country has been so robust, Macklem said in an interview with Bloomberg News.
“Because people are working from home, they don’t need to commute,” Macklem said via video-conference.
“Many people feel that even after the pandemic there is going to be more flexibility in many workplaces to work from home than there was in the past.”
Canadian real estate boomed in 2020 even as COVID-19 laid waste to the economy and labor market. Unprecedented demand and the tightest-ever supply pushed national home prices to a record in December, with some of the largest increases happening in rural areas a couple of hours outside major centres.
It’s the sort of rally that often raises concern among central bankers, worried they may be stoking a bubble with low interest rates. At a decision on Wednesday, Canadian policy-makers kept the overnight interest rate at 0.25 per cent and reiterated a commitment to keep borrowing costs low until damage from the pandemic is fully repaired, something they don’t see happening until 2023.
Low financing costs will probably mean demand for single-family homes continues to outstrip supply in 2021, according to the Monetary Policy report that accompanied the decision.
But the governor says he’s not worried about the country’s real estate market getting out of control, contrasting conditions now to 2017 when runaway prices in cities such as Toronto drew warnings about speculative bubbles and forced officials to take steps to cool things down.
“So far we are not seeing the kind of excessiveness in the housing market that would really get us worried,” Macklem said. “This doesn’t look like 2017.”
The most recent boom isn’t concentrated in higher-priced markets but is more broad-based across the country, the governor said. “That I think in itself is implying this is less driven by speculative activity and more driven by fundamental demand.”
The bank has been looking for evidence that prices are rising because people are betting on future gains, so-called extrapolative price expectations. So far, it hasn’t found any.
“We start to get worried when people buy houses for the sole reason of thinking the price will go up,” he said. “These are the kinds of things we are watching in a low-for-long world.”
Nor has the bank found any evidence that low rates are creating the kind of financial system vulnerabilities that would require it to change policy, though they are monitoring the situation.
“We are conscious that there are some risks here,” he said. “We are going to have to keep an eye on this and avoid a buildup of vulnerabilities.”
In the interview, Macklem also said the nation’s economy is flush enough with stimulus to survive the current downturn and doesn’t need additional help from monetary policy.
He said policy-makers considered whether more measures were needed to spur growth — including a micro-cut of their 0.25 per cent overnight policy rate — but determined that “we have a considerable amount of stimulus in place.” The bank is expecting a quick recovery from a first-quarter contraction, a scenario that would eventually require it to pare back asset purchases.
“If the economy plays out in line or stronger with our outlook, then the economy is not going to need as much quantitative easing stimulus over time,” Macklem said. While the central bank has a number of tools it can use if needed to add stimulus, “in our base case we don’t expect that we will need to use them.”
In Wednesday’s decision, the central bank expressed optimism the economy remains on track to fully repair damage from the pandemic by 2023, even as Canada struggles with a wave of new COVID-19 cases and lockdowns right now.
Some analysts had speculated the central bank could turn bearish this week, with a fresh cut to shore up a recovery that is being hampered by a strengthening currency, on top of the worsening pandemic.
In the interview, Macklem said that the stabilization of financial markets has made a small rate cut a viable option, if needed.
“We discussed the degree of monetary stimulus we need, and if we thought we needed more, a micro cut was among the things we could do,” Macklem said by video conference. The bank’s governing council determined it wasn’t necessary, he said.
To be sure, there’s no prospect of any quick withdrawal of stimulus either.
At a separate press conference Wednesday, Macklem said any slowing of the QE program would be gradual. Nor is the Bank of Canada poised to raise borrowing costs. It’s pledged not to hike its policy rate until economic slack has been fully absorbed, something not expected to happen until 2023.
There are other concerns. With inflation hovering below 1 per cent, Macklem said the central bank is more worried about deflationary pressures than any temporary overshoot of its 2 per cent target.
The weakening u.s. dollar is another challenge, with any further broad-based depreciation a potential headwind.
“To the extent that is weighing on our forecast and dampening growth in Canada, everything else equal, we’d need more monetary stimulus to get back to our inflation target,” the central banker said.
NOT SEEING THE EXCESS THAT WOULD REALLY GET US WORRIED.