TORONTO — Today’s Bank of Canada Financial System Review contained few surprises: vulnerabilities stemming from housing market imbalances and household indebtedness are rising, but the risk of a severe economic shock remains low. Beneath the surface, however, RBC thinks the Bank of Canada’s analysis raises some important issues.
First, the increase in housing market imbalances since December reflects price acceleration in the greater Toronto area. There is early evidence that changes in housing regulation announced by the Ontario government in April are beginning to cool the market, said Economist Josh Nye.
However, in the case of Vancouver and a number of international markets, the dampening effect of similar measures was temporary. If the slowdown in Toronto also proves transitory, will we once again be looking at rising imbalances within a year? he asked.
Second, household indebtedness continues to rise, albeit with a somewhat changing composition. The bank noted improved credit quality in insured mortgages following changes in macroprudential regulation, Nye explained.
“But the share of uninsured mortgages is rising and there is evidence of increased risk in that space,” he added. “If changes in regulation simply improve one segment at the expense of another, how well are they containing vulnerabilities from rising debt levels, and will they be effective in reducing market imbalances?
“That raises the question of whether higher interest rates will ultimately be needed to cool housing and credit growth,” said Nye.
When asked as much, Bank of Canada Governor Stephen Poloz did not repeat his usual refrain that monetary policy should be a last resort in addressing those issues. Instead, he noted Canada’s improving economic backdrop is reducing the conflict between needing accommodative monetary to support growth and not wanting to exacerbate imbalances, Nye explained.
“The bank is sounding more confident in the outlook, and if incoming data continue to support their forecast for above-trend growth this year, we think policymakers will begin to contemplate raising rates,” he added. “Our forecast is for the bank to start tightening in the first half of 2018. We see gradually removing accommodation as one way to help address the issues of rising indebtedness and accelerating home prices that featured prominently in today’s report.”
SOURCE: RBC Economics press release