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We will soon see where the ultimate power lies in our economy: with the Bank of Canada, or the housing market.

The central bank’s next chance to adjust its trendsetting overnight rate comes Wednesday. An increase sends a message that the housing market will not be allowed to go on another affordability-destroying rampage.

Evidence of a rebound in the housing market after big price declines from the early 2022 peak is piling up. Without some restraint put on housing, we run the risk of a cascade of negative outcomes for the economy and society.

The Bank of Canada already has a strong economic inflation-fighting rationale for a rate hike on Wednesday, even if it would layer on more pain for people with variable-rate mortgages and lines of credit. A month-by-month string of declines in the inflation rate came to a halt in April, and economic output in the first quarter of the year was stronger than expected, which puts even more pressure on prices.

Housing cinches the case for a rate hike either Wednesday or at the July 12 rate setting. Before May, there were signs of revival in house prices. May results have only been reported a few areas, but the trend is clear.

Calgary’s resale market had its busiest May ever for sales and Toronto’s average selling price jumped 3.7 per cent over April. National Bank of Canada economists said Vancouver’s May numbers put sales back to the 10-year average, which is to say buyers are out in force.

You get some insight into how much demand for homes in Toronto is overwhelming the comparatively low number of properties for sale in this headline on a recent Globe and Mail real estate story: “Fifteen buyers face off over new townhouse near Vaughan hospital.” The home, located in a suburb north of Toronto, was listed at $998,000 and sold for $1.2-million.

There aren’t enough houses for sale in Canada to satisfy demand from a population growing rapidly because of immigration needed to sustain economic growth. Not enough homes are being built, and existing owners are hanging onto their properties.

Juicing the supply of houses for sale seems a hopeless cause right now, but high demand can be addressed in a matter of days. All we need is for the Bank of Canada to raise rates on Wednesday and single out the housing market in its comments. Or, at least cite housing as a reason why the Bank’s finger is on the trigger of a July rate hike. That would push some would-be buyers out of the market.

Only variable-rate mortgages are immediately affected by the central bank’s overnight rate, and they’re out of favour right now. But if the bank comes on strong about the risks of inflation and housing, then we could see higher rates in the bond market. Bond yields are a big influence on the cost of fixed-rate mortgages.

We saw this linkage last month, when concerns that inflation isn’t retreating as expected caused a big jump in the yields for Government of Canada bonds. Big banks and other lenders responded by pushing up costs on their fixed-rate mortgages by 0.1 to 0.65 of a percentage point.

It’s possible that this recent mortgage rate increase could cool housing later in the summer, once buyers who locked in lower rates either buy or bow out. But the need to slow down housing is too important for the Bank of Canada to stand by as a passive observer, like it did when house prices soared in 2021. A rate hike this summer would be more assertive.

It’s quite a comment on Canadian housing to have to describe a rally back from a big price decline as a negative. In fact, you’re probably cheering for higher prices if you’re already in the market and measure your wealth by gains in equity. But the country is better served by a flat or mildly lower housing market.

Let us count the ways a hot housing market wrecks things:

The already serious affordability problem in big cities for young buyers is worsened.

  • More people are pushed into renting, which feeds hikes on rents which are already at massive levels.
  • Resentment about being denied home ownership threatens to add more anger to our political discourse.
  • The economy continues to skew excessively to real estate investment rather than diversifying in other areas.
  • More urbanites migrate to affordable cities, causing their real estate markets to heat up and price out long-time residents.

House prices rise over time – that’s basic economics. It’s now up to the Bank of Canada to help this happen in an orderly way.

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