Bank of Canada Governor Mark CarneySean Kilpatrick
Bank of Canada Governor Mark Carney is warning consumers not to get in over their heads in the real estate market, and asking that bankers take care with the mortgages they offer because interest rates will eventually move up.
The central bank is concerned about the strength of the Canadian housing market, Mr. Carney said yesterday in his first significant comments on the market's rapid rebound.
"We expect prudence from lenders," he said. "We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan."
The Bank of Canada has already carried out one analysis of the risks posed by the real estate market, and will be doing a more detailed study that will break down consumers based on income levels.
"We do have some concerns about it," Mr. Carney said, but was careful not to overstate the risks. "Obviously, consumer borrowing cannot grow faster than the economy forever."
Sales of existing homes are already near the peak levels they hit before the crisis took hold.
The average price of an existing home was $331,602 in September, a 13.6-per-cent hike over one year, the Canadian Real Estate Association says.
Mr. Carney suggested the rebound stems from consumers unleashing pent up demand, noting there was a "significant pause" in housing activity during the crisis. He added that houses are more affordable, due to both prices and mortgage rates, and he expects the strength to trail off in 2011.
The central bank identified the real estate market as one of the key upside risks to its inflation outlook, saying that "Canadian households may increase their spending on consumption and residential investment more strongly than projected" as the recovery takes hold.
Mortgage and renovation loans are helping to fuel the economy right now. "Unlike the situation in most other advanced economies, Canadian consumers can readily obtain credit, as evidenced by the continued brisk pace in its growth," the bank said yesterday in its Monetary Policy Report. "The strength in household credit is linked to the rebound in the housing market and the pickup in renovation activity."
Low interest rates, coupled with a government program that has bought more than $64-billion in mortgages from lenders to free up space on their balance sheets, have helped drive mortgage rates to historic lows.
But by saying it expects prudence from lenders and borrowers and that it is watching the situation, it seems the central bank intends to let the situation play out for now, HSBC Securities (Canada) Inc. economist Stewart Hall said.
"Is their head in the sand? Maybe, maybe not," he wrote in a research note. "Indeed the banking system has been padding its margins by raising the cost to borrow, which is to suggest that market pricing for credit could be applying some of the braking power that the bank is not inclined to apply at this stage of the recovery."
Banks have begun raising some of their mortgage rates this month. Nevertheless, it would be easy to view the bank's decision to drive interest rates down to 25 basis points and the government's program to buy billions in mortgages as key elements in the runup in the real estate market, Mr. Stewart suggested.
"Limited as they are, anecdotal stories out of the Vancouver area suggested to us that it was not so much pent up demand that was driving activity as a fertile monetary environment."
Canada's housing market went through a brief correction that began last October and ended around May, National Bank economist Stéfane Marion said in a recent report. "Market conditions have turned around so rapidly in Canada that they went from a buyers' market to a sellers' market in the blink of an eye."