When you listen to Bank of Canada Governor Stephen Poloz muse about the Canadian housing market – as he did at some length this week – it’s helpful to keep one thing in mind: Strictly speaking, the affordability of the country’s housing market isn’t really his job.
But, paradoxically, it is his worry.
In a speech in Winnipeg this week, Mr. Poloz waded pretty deeply into the housing weeds, including in areas that are beyond the purview of the country’s central bank. His call for innovations in Canada’s mortgage market – pushing ideas such as longer durations and shared-equity mortgages – prompted a fair bit of head-scratching in the banking sector, which had no idea Mr. Poloz was so eager to express such opinions about a business that the central bank does not regulate. Some wondered if there was a subtle shift in monetary policy hidden in the message somewhere.
But let’s put this in context regarding recent Bank of Canada communications. Two weeks ago, when the bank issued its most recent rate decision and quarterly economic estimates, Mr. Poloz noted that housing was the most dominant issue in the rate deliberations of the policy-setting Governing Council. The bank also released a research paper breaking down the contributing factors to the decline in housing resales over the past three years. In a news conference at the time, Mr. Poloz even invited reporters to ask him to talk more about the bank’s latest views on housing – but no one in the room took him up on it. He picked up on the theme again at his next speaking opportunity, in Winnipeg this week.
If there’s one message to take away from all this, it’s that the Bank of Canada wants the country and the world to know that it’s keenly aware of the potential risks posed by the housing market to the country’s economic outlook and its financial stability. Despite its decision to raise interest rates last year, it hasn’t taken its eye off the housing ball and, indeed, may be increasing its focus on this key segment of the economy.
But the Bank of Canada has an awkward relationship with the housing market, and Mr. Poloz can’t ever forget it.
While many Canadian consumers look at the bank’s setting of interest rates primarily through the lens of mortgage borrowing, the truth is that they are only a very tiny slice of the economic picture when it comes to interest rates. Rate changes affect the pace of the entire economy, which is why they are the central bank’s primary tool for maintaining a healthy pace of economic activity. What’s more, a central bank’s policy interest rate is a decidedly blunt tool for influencing housing markets – applying a force to every part of the economy in order to address a condition that affects one smallish sector that typically has considerable regional disparities.
Which is why any central banker worth his or her salt wouldn’t use housing-market interests as its guide to interest rate decisions. It would, simply, be terrible monetary policy.
Yet, it’s unavoidable that rate changes will affect housing activity, and, by extension, the debt associated with housing. That has spillovers for consumer spending, home construction and the businesses of the lenders to whom consumers are indebted – all issues to which the central bank, in its role as guardian of a healthy economy and a stable financial system, must remain sensitive.
To understand Mr. Poloz’s publicly heightened attention to the sector is to understand his sensitivity to risks to economic and financial stability from the complex adjustment housing markets are undergoing – and, critically, from the record levels of mortgage debt. Risk management is at the root of everything Mr. Poloz does on the job, and he has been saying, for years, that housing-market imbalances and elevated household debt are the bank’s biggest risks. His musings about mortgage innovations have little to do with helping borrowers and lenders, and everything to do with examining ways to mitigate the risk of future interest-rate changes.
The evolution of the economy will inevitably dictate what the Bank of Canada does with interest rates – and the most likely direction, over the next few years, is upward. Those changes are both unavoidable and desirable for the broader economy. But the heightened state of the country’s housing sector and household debt means that the fallout may be substantial, and Mr. Poloz knows it. What we’re seeing here is a central bank that is pedalling as fast as it can to understand and anticipate that fallout, even as it resists letting those concerns leak too far into its rate decisions.