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A for sale sign outside a home indicates that it has sold for over the asking price, in Ottawa, on March 1, 2021.

Justin Tang/The Canadian Press

The Bank of Canada’s continued low-interest-rate policy risks sending home prices up further, economists say, adding to concerns that the market is overheated and debt levels will be unmanageable when rates do start to rise.

In its scheduled Wednesday monetary policy announcement, the central bank said housing activity has been “much stronger than expected,” while keeping its key interest rate at 0.25 per cent.

The central bank is facing a tricky predicament: It needs to keep interest rates down to stimulate an economy that has been sideswiped by the COVID-19 pandemic without encouraging excessive borrowing and driving home prices even higher.

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Bank of Canada holds fast on rates, bond buying; sees economy gathering steam

Bank of Canada’s heightened focus on labour slack may cool the heels of the bond market

“The Bank of Canada is in a challenging position at the moment. Low rates will support the economic recovery, but it does risk encouraging the housing frenzy,” said Sri Thanabalasingam, a senior economist at Toronto-Dominion Bank. “The bank may leave it to other policy makers to rein in the housing parade.”

Since the pandemic started, home prices and sales have been setting new highs for months, driven by cheap borrowing, low inventory and a shift to detached properties outside of major cities. Suburbs and semirural areas have seen the sharpest price increases with some seeing property values rising more than 30 per cent over the year.

“Setting expectations of no movement in interest rates for another two years, while having merits for the broader economy and job market, could add further fuel to housing,” said Robert Kavcic, a senior economist at Bank of Montreal.

The Bank of Canada’s announcement reiterated that it did not expect to raise the benchmark interest rate until 2023 and would continue stimulating the economy with its bond-buying program until the recovery is well under way.

“It seems that with this message today they played it safe, not really committing to anything and by design not to spook the market and to manage the delicate balance between the recovery and housing,” said CIBC deputy chief economist Benjamin Tal.­

Although low interest rates have made it easier for borrowers to service their debt, they are also sending residential mortgage debt to a record high. The pace of mortgage borrowing is at its highest level since 2010, when the country was recovering from the global financial crisis.

“The higher the household debt is, the more vulnerable households are to rate hikes,” said Ksenia Bushmeneva, an economist at TD. “High levels of debt make households vulnerable to future interest rate increases,” she said.

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While the real estate sector has led the economic recovery, the mortgage debt accumulation has put households in a more precarious position. As well, the significant price increases has made more parts of the country unaffordable. National Bank of Canada’s latest affordability report showed cities that were once considered affordable, such as Hamilton, are becoming well out of reach for local residents.

“Policy makers have to strike a fine balance between maintaining one of the stronger economic sectors on track while the pandemic is still a threat, and the build-up of household debt vulnerabilities that accompanies the housing market frenzy,” said Robert Hogue, a senior economist with Royal Bank of Canada.

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