According to The Globe and Mail the Bank of Canada’s top brass assured a parliamentary committee that Canada’s bloated housing market has not become a risky asset bubble, despite the central bank’s own calculation that house prices nationwide are roughly 20 per cent overvalued.
“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble.
“Our housing construction has stayed very much in line with our estimates of demographic demand,” he said. “There’s no excess.”
This despite the central bank’s own estimate, published last December in its Financial System Review, that Canada’s housing market is overpriced by between 10 and 30 per cent.
Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession.
“This is one of the by-products of what we’ve been through. It’s not something that happened simply by itself,” he said. “It would be very unusual to have that and not have a degree of overvaluation.”
Mr. Poloz added that the overvaluation doesn’t necessarily mean the market is in need of a 10-to-30-per-cent downturn to bring it back into balance. He said that rising incomes as the economy gains momentum could help close the affordability gap, without a sharp drop in home values.
“We believe that as the fundamentals catch up with it, it will be sustained,” he said.
Senior Deputy Governor Carolyn Wilkins added that the central bank still believes Canada’s overall housing market is “headed for a soft landing,” despite the sudden oil-shock upheaval that threatens considerable instability in Alberta’s until-recently booming housing sector.
“We’re not expecting whatever transpires in Alberta to create spillovers that, from a financial stability standpoint, would be worrisome for the rest of Canada.”
Mr. Poloz also defended the Bank of Canada’s surprise cut of its key interest rate in January, which critics fear may exacerbate Canadian households’ already hyper-extended mortgage and debt loads.
“On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability,” he said in his opening statement to the committee. “However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains.”
“We believe that the best contribution the Bank can make to lowering financial stability risks through time is to help the economy return to full capacity and stable inflation sooner, rather than later.”
Mr. Poloz added that he believes the January rate cut, which reduced the bank’s key rate to 0.75 per cent from 1.00 per cent, is doing its job in helping the Canadian economy weather the effects of the oil shock – although he admitted that the evidence of the cut’s impact “is thin at this stage.”
“The evidence we have at present would be primarily in the export sector,” he said, where the resulting decline in the Canadian dollar has been boosting exporters’ Canadian-dollar cash flow and improving their price competitiveness in export markets.
Source: Bank of Canada's Poloz dispels speculation of housing bubble by DAVID PARKINSON, The Globe and Mail
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