Bank of Canada not seeing ‘alarm bells’ in housing market despite mortgage pain

The Bank of Canada is not yet concerned about the impact of rapidly rising mortgage rates on the overall health of the country’s housing market.

That was the message from governor Tiff Macklem when he was asked after a speech to the Toronto Region Board of Trade on Thursday about how the central bank is thinking about the future of Canada’s housing market.

Macklem said the bank’s rapid increase in interest rates since March 2022 — the policy rate stands at 4.5 per cent following two consecutive decisions to hold — has effectively cooled housing activity and driven double-digit declines in home prices across many markets.

He told the crowd that the central bank sees the housing correction continuing in the months to come, though some markets are already stabilizing and even seeing prices and activity tick back up.

Macklem acknowledged, however, that the cost of slowing the economy by raising the cost of borrowing — a sustained effort to get inflation back to the Bank of Canada’s two per cent target — has made life harder for many homeowners.

Those with variable rate mortgages who purchased homes at the peak of prices during the pandemic, for instance, as well as those renewing their fixed mortgages in today’s higher interest rate environment, are in many cases facing much higher monthly payments.

“We are acutely aware that some Canadians have been very squeezed by the interest rate increases,” Macklem said Thursday.

The central bank head also flagged that mortgage delinquencies, which were quite low during the pandemic, are starting to tick back up again, though he said this was more a normalization than a cause for concern.

“They are coming up, but they’re still only just getting back to pre-pandemic levels. So that is something to watch,” he says.

Despite the current weakness in the real estate industry, Macklem also said that Canada’s housing market has “strong underlying fundamentals” that will sustain demand in the sector longer-term.

Strong levels of immigration, in particular, will help to keep Canada’s housing sector afloat through the current period of higher interest rates, he said.

Even if there is a surge in Canadians who are unable to make mortgage payments on their homes, Macklem sought to assuage concerns that it would spur a domino effect through the economy.

“I don’t want to say that there aren’t some individuals who are really feeling the pain,” he said.

“But if you look at the household sector overall, we’re not seeing alarm bells.”

Meanwhile, Macklem said the central bank is ready to step in if stress in the global banking system affects Canada, but emphasized it won’t back off from its inflation fight as it works to bring inflation down to its two per cent target.

Macklem addressed the recent stress in the global banking system that was set off by the collapse of Silicon Valley Bank in the United States.

“Here in Canada the spillover effects have been muted, reflecting the financial stability we are known for internationally,” he said. “But financial stability risks remain.”

Macklem concedes that financial instability raises the odds of a sharper economic downturn but says achieving both financial stability and price stability is important and that the two are related.

The governor says the central bank has separate tools to address both mandates and that the Bank of Canada will take into consideration the interacting effects between financial stress and inflation.

If financial stress leads to tighter borrowing conditions that make loans more expensive and harder to get, he says the governing council would take this into consideration when setting the policy rate.

“In the current environment, monetary policy has already tightened financial conditions,” Macklem said.

“But if financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target.”

Though inflation has fallen significantly from its peak of 8.1 per cent last summer, Macklem stresses that the Bank of Canada’s job is not done just yet and there is work to do before it can move below three per cent.

The Bank of Canada paused its aggressive rate hiking cycle earlier this year to monitor the effects of its previous rate hikes on price growth. So far, inflation has been falling fast enough to keep the Bank of Canada on the sidelines, but the central bank is keeping the door open to more rate hikes if needed.

“If we start to see signs that inflation is likely to get stuck materially above our two per cent target, we are prepared to raise rates further,” Macklem said.

— with files from The Canadian Press