Bank of Canada Governor Stephen Poloz cautioned a Vancouver audience about the risks of "froth” returning to the housing sector, saying that the central bank is watching for signs that the renewed strength in housing in provinces such as British Columbia could reignite speculation in those markets.
In remarks at the Greater Vancouver Board of Trade’s Economic Outlook Forum Thursday, Mr. Poloz attributed the return of strength in housing – particularly in B.C., Quebec and Ontario – to a combination of healthy employment and wage growth, and immigration-driven population gains. That is driving “fundamental demand” that, he said, “appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices.”
However, he cautioned, “We will be watching for signs of a re-emergence of extrapolative expectations returning to certain major housing markets – in short, what we call ‘froth.’ ”
His comments echoed similar warnings he issued in 2016, when the Greater Vancouver and Greater Toronto housing markets were going through booms that were fuelling rapid price increases. He expressed concern at that time that the hot markets were causing potential buyers to assume a continued similar pace of price gains in the future – a situation he saw as unsustainable and risky.
“It can be very unhealthy when the situation becomes speculative, because it can lead to a sudden downdraft in house prices later on, with wider implications for the economy,” Mr. Poloz said in Thursday’s remarks.
In a news conference after his talk, Mr. Poloz said that the B20 mortgage stress-test rules implemented nationally two years ago, combined with other regulatory and tax measures, have been effective in dampening housing speculation in the Toronto and Vancouver areas. “It cooled those expectations, made it less automatic that people were going to profit by investing in more housing. That has given us somewhat more balanced markets in those hot areas," he said.
However, he said that because demand continues to outpace new supply in key markets, “We still have the ingredients that could give rise to more speculation. We’ll be watching that closely.”
Still, Mr. Poloz indicated that the Bank of Canada has no intention of using higher interest rates to keep a lid on housing markets.
“That is not going to distract us from Job One, which is to stabilize the macroeconomy, and through that to achieve our inflation targets,” he said. “We see the implications for certain housing markets as kind of a side effect of that primary mission.”
The Vancouver event marked the last public address from Bank of Canada officials prior to the Jan. 22 interest-rate decision and Monetary Policy Report, the central bank’s quarterly update of its economic outlook. This was Mr. Poloz’s first public address in nearly a month. In that time, Canadian economic indicators have been generally disappointing, prompting private-sector forecasters to suggest that the economy posted little to no growth in the final quarter of 2019. That’s well below the Bank of Canada’s most recent forecast, issued in late October, of 1.3 per cent annualized growth.
In the news conference, Mr. Poloz noted that the fourth quarter was hit by rail and auto strikes, as well as some adverse weather, that may have temporarily dampened the economic data.
“Those kinds of things need a lot of interpretation,” he said.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said Mr. Poloz seemed to be “looking for excuses for the data coming in below [the Bank of Canada’s] forecasts – which implies that he’s not quite as concerned yet.”
Mr. Shenfeld said the central bank chief may have been choosing his words particularly carefully because his comments came less than a day before a key economic report – Friday’s Canadian Labour Force Survey for December. Employment declined in each of the previous two months, including an alarming plunge of 71,000 in November. The December figures will provide further indication of whether that downturn was a blip, or the beginning of a worrisome trend.
“The Governor was a a bit guarded in making too many pronouncements, because he hasn’t seen those employment numbers,” he said.
Mr. Poloz said in his address that the trade picture has improved “on the surface” recently, with China and the United States agreeing to halt tariff increases, and with ratification nearing on the new North American trade pact. However, he said, “it remains to be seen whether this will lead to a recovery of trade and investment.”
He said the Bank of Canada estimates that the U.S.-China trade conflict has reduced global gross domestic product by “around 1 per cent” this year. “This loss will very likely be permanent,” he said.
“Clearly, the Canadian economy is not immune to global developments,” Mr. Poloz said. “We at the bank are watching for signs that adverse impacts of trade disputes are being felt beyond the export sectors that have already been directly affected. ... We are looking to see the extent to which weakness from manufacturing may be spreading to services, to employment, to consumer spending or to housing. In this regard, the most recent data have been mixed."
Mr. Poloz said the central bank was pleasantly surprised at the unexpected strength of business investment numbers in the third-quarter GDP report, which came out in late November. However, he said, the bank’s staff is digging deeper into the numbers to better interpret that strength, and its significance for growth in both the economy and in the country’s overall productive capacity. He said the bank would provide “a more complete narrative” on the topic in the Jan. 22 Monetary Policy Report.
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