Bank of Canada States Intention to Let Housing Market Regulate Itself

Published October 12, 2020 by Real Estate Leads

Go back 7 months of so and generally speaking people taking an interest in the future of the housing market in Canada were of two camps generally; those that thought it wouldn’t weather the COVID 19 pandemic storm particularly well, and those who expected it would be a lot more resilient than people would give it credit for. Well, here we are spring of 2020 a very distant blip in the rearview mirror and it appears the people in that second camp were right.

That’s because, as we’ve seen, the housing market has actually heated up overall and the many different reasons that people explained would factor into that outcome have proved to be legit. People have talked about the ‘pent-up demand’ factor, people have talked about the always-relevant supply and demand factors, and then of course there’s ongoing buyer prerogative shifts that have factored into this too.

And before we get into the meat of discussing this, we should say that an increasingly valuable housing market in Canada is overall a good thing for the country. Real estate routinely makes up nearly half of Canada’s GDP (Gross Domestic Product) growth, and so even if you’re one of the people who decries the cost of real estate in Canada you still can’t deny that you and every other Canadian is benefiting from it in a more indirect but very tangible way.

Yes, the way this benefits those with careers in real estate is a part of our way of looking at this. That doesn’t, however, make the business any more of a potentially lucrative one than it ever has been previously. Realtors will know that real estate is a very competitive business, and that’s why our online real estate lead generation service in Canada here at Real Estate Leads is so highly recommended for realtors who are newer to the business.

Just last week the Bank of Canada (BOC) weighed in on all of this, and their belief regarding it is one that’s in line with those who either have equity in real estate or are working to help those people as real estate industry professionals.

Gov’t Free to Intervene, but National Bank Won’t

The BOC knows full well that emergency pandemic policies are inflating house prices, but BOC GovernorTiff Macklem has stated it’s not the central Bank’s place to be interfering in the market, and that’s a prudent understanding for many different reasons.

The BOC has stated that it intends to keep the emergency measures ― rock-bottom interest rates, purchases of Canadian mortgages and government debt ― in place for the foreseeable future, and stated further that soaring house prices won’t change the Bank’s direction. Their commitment to keep interest rates low is unwavering at this time, but Macklem did state that if too many Canadian households move towards becoming dangerously over-leveraged then policy-makers have several tools they can put into place to counter that.

The mortgage-interest stress test is integral to that, and it’s very much of an ‘ain’t broke don’t fix it’ type of situation at this time. Other of these tools include government regulation measures like mortgage insurance, foreign buyers’ taxes or empty-home taxes.


The BOC then stated further that they will keep their administered (interest) rate pinned down for the next few years, even if that policy contributes to increasing vulnerabilities. Should those vulnerabilities come around then the Bank would look to other policymakers to contain any growing risks, given that raising rates prematurely would also stunt the recovery.

Wait & See Mode

The average resale price of a home in Canada went up by 18 per cent in August, compared to a year earlier, one of the strongest gains on record despite the ongoing economic crisis.

Economists are crediting the Bank’s lowering of interest rates this year as a foremost reason for this. It’s been estimated that the drop in mortgage rates over the past year has increased buyers’ maximum purchase price by 24%.

This means greater numbers of qualified buyers are able to get into the types of homes they need for themselves and / or their families, and there shouldn’t be anything that anyone should disapprove of with that.

It’s also true that to this point the federal government has not taken any steps to cool house price growth, and its FTHBIA plan (First Time Home Buyer Income Assistance) is intended to be a ‘demand-side’ policy that would increase the amount of money Canadians can spend on a home. It’s unlikely to reduce house price growth, and it was never expected to do so despite what some people had hoped it would do.

Another very integral factor here is that Canadian cities are suffering from a chronic shortage of housing, and this is pushing up prices. This is something that doesn’t look like it will be going away anytime soon, and it’s a reality that people need to address head on rather than wishing it were otherwise.

BOC Leery of Raising Rates – 500 Billion Reasons Why

The pile of reason the BOC will want not to raise interest rates to slow soaring house prices is a mammoth one. For starters it fears that higher borrowing costs will sink the many people and businesses who loaded up on debt before and during the pandemic. Next we have them dropping their key lending rate to near zero and buying hundreds of billions of dollars of debt ― including around $100 billion of federal government debt and billions more in Canadian mortgages.

This was done in an effort to pre-empt what could have been a major financial crisis, something that would be bad for everyone, including those who are displeased with the cost of housing and how it’s a barrier to their getting into the market.

The BOC has also increased its balance sheet by $500 billion since the spring, injecting this much new cash into the economy, in the form of debt owed to the Bank. Central banks have pushed down interest rates, making it more affordable for households, businesses and governments to weather the crisis. This is called ‘quantitative easing’, and while it’s a good thing in the biggest picture it does always cause asset prices to skyrocket.

This is a more detailed and causation view into why Canada’s average home sales prices are soaring in the middle of a pandemic. Can this change in the future? Absolutely it can, but we need to question whether or not that would be a good thing for ALL of us and not just a select few who’d like to see home values decrease.

For the very foreseeable future, that’s not happening.

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