The criticism by David Dodge, the former governor of the Bank of Canada, of his successor Mark Carney, on an issue of monetary policy, was an ill-judged and surprising departure from custom. Mr. Carney’s warnings about the risks of high levels of household debt in Canada, and about arguably overheated housing markets, are of course open to debate, but they have a considerable basis in evidence.
As well as being a senior adviser at the law firm Bennett Jones, Mr. Dodge is now a member of the board of directors of the Bank of Nova Scotia. The chartered banks of Canada are competing with each other for the consumer loans business, and particularly for home equity lines of credit, as well as for old-fashioned purchase-money residential mortgages. In general, the banks appear to be willing to accept some stronger regulation in these markets, but none of them are keen to restrain their lending, which might result in a loss of market share.
Mr. Dodge attributes high housing prices in Toronto and Vancouver to foreign investors rather than Canadian consumers, and to some degree he may well be right. Even so, such speculators raise prices for everybody, tempting ordinary home-buyers (as well as owners) to overextend themselves – and speculation can be followed by a crash that reduces the equity of all homeowners.
A section in the Bank of Canada’s most recent Monetary Policy Report, which itself summarizes a special issue of the Bank of Canada Review, is enough to give most readers pause. It describes the harmful effects of a prolonged “extraction” of home equity through borrowing for consumption purposes, including an eventual dampening of aggregate consumption levels – and vulnerability to economic shocks.
Paradoxically, Mr. Carney himself has seen fit, so far, to keep interest rates low, which has the side effect of making home-equity extraction quite easy in the short term. Mr. Dodge reportedly favoured Mr. Carney as his successor, but his optimistic comments on the housing markets, tending to minimize these risks, undermine the present Governor’s salutary efforts at persuasion.