OTTAWA—Bank of Canada Governor Mark Carney is warning of a housing price bubble, particularly in big city condo markets, that could burn many Canadians once interest rates rise to normal levels.
In a speech in Vancouver, he said the overheated housing market is in danger of taking on the characteristics of a speculative play where “expectations” overtake the normal workings of supply and demand.
The risk is that this will lead to a housing bubble driven by “the classic market emotions of greed and fear—greed among speculators and investors and fear among households that getting a foot on the property ladder is a now-or-never proposition.”
While he suggested that an expected cooling off of the economy may take some steam out of real estate, Carney said heavily indebted Canadian households are at risk of suffering financially when interest rates rise above today’s unusually low levels.
He noted that Canadians are now as deeply in debt (relative to their income) as consumers in the United States and Britain, which both suffered a financial meltdown in 2008 and 2009.
“The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years,” Carney said in analysis of the Canadian housing sector.
He said it was appropriate for the central bank to keep its influential overnight rate at historically low levels since early 2009 to spur business activity and speed economic recovery. But low interest rates, “even if appropriate. . . .create their own risks.”
The country “should not be lulled into a false sense of security by current low rates,” Carney said, adding that “households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”
The bank governor has been warning for two years that many overexposed households will face a rude awakening when interest rates go up. But he gave no hint when the central bank would push up mortgage costs by hiking its trend-setting overnight rate. In the latest decision on May 31, the bank maintained the rate at 1 per cent.
And, as he did on May 31, Carney repeated Wednesday that any decision to push borrowing costs would have to be “carefully considered.”
Carney balanced his warning about a housing bubble with a forecast that house prices may moderate as the economy slows a bit in the second half of this year. But the bank said there are “conflicting signals” about this trend. While consumer spending declined in early 2011, housing investment and mortgage credit were on the rise. If this continues, it could pose a risk of runaway inflation, Carney said.
He said cheap credit from low interest rates has been used to bid up Canadian housing prices, which have increased by more than 250 per cent in the past 20 years.
And in recent years in Canada, domestic demand factors are not the only forces at work, Carney pointed out.
“Some Asian wealth is being invested in selected international housing markets as those investors seek out diversification and hard assets.
“This has become a familiar phenomenon” in Vancouver, he said. Partly as a result of Asian investment, “the average selling price of a home in Vancouver is now nearly 11 times the average Vancouver family’s household income, a multiple similar to those seen in Hong Kong and Sydney—cities that have also become part of a more globalized real estate market,” Carney remarked.