Skip to main content

Economy Bank of Canada's Poloz dispels speculation of housing bubble

Bank of Canada Governor Stephen Poloz delivers a speech to students and business leaders at Western University's Ivey School of Business in London, Ont. on Tuesday, Feb. 24, 2015. THE CANADIAN PRESS/ Mark Spowart

The Canadian Press

The Bank of Canada's top brass assured a parliamentary committee that Canada's bloated housing market has not become a risky asset bubble, despite the central bank's own calculation that house prices nationwide are roughly 20 per cent overvalued.

"We don't believe we're in a bubble," Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada's long-running boom in the housing market hasn't been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble.

"Our housing construction has stayed very much in line with our estimates of demographic demand," he said. "There's no excess."

Story continues below advertisement

This despite the central bank's own estimate, published last December in its Financial System Review, that Canada's housing market is overpriced by between 10 and 30 per cent.

Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada's economy during the Great Recession.

"This is one of the byproducts of what we've been through. It's not something that happened simply by itself," he said. "It would be very unusual to have that and not have a degree of overvaluation."

Mr. Poloz added that the overvaluation doesn't necessarily mean the market is in need of a 10-to-30-per-cent downturn to bring it back into balance. He said that rising incomes as the economy gains momentum could help close the affordability gap, without a sharp drop in home values.

Senior Deputy Governor Carolyn Wilkins added that the central bank still believes Canada's overall housing market is "headed for a soft landing," despite the sudden oil-shock upheaval that threatens considerable instability in Alberta.

"We're not expecting whatever transpires in Alberta to create spillovers that would be, from a financial stability perspective, worrisome for the rest of Canada," she said.

In its Monetary Policy Report published two weeks ago, the Bank of Canada expressed concern that the oil shock's impact on Alberta's housing market, as well as the continued price booms in Toronto and Vancouver, "suggest a risk of a correction in these markets." It added that if all three of these major markets were to suffer a downturn simultaneously, "the spillover effects to the rest of the economy would be significant."

Story continues below advertisement

However, Ms. Wilkins stressed that historically, regional housing downturns typically remain localized events. "We don't see that regional crashes tend to spread to other areas."

Mr. Poloz also defended the Bank of Canada's surprise cut of its key interest rate in January, which critics fear may exacerbate Canadian households' already hyperextended mortgage and debt loads.

"On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability," he said in his opening statement to the committee. "However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains."

Mr. Poloz added that he believes the January rate cut, which reduced the bank's key rate to 0.75 per cent from 1 per cent, is doing its job in helping the Canadian economy weather the effects of the oil shock – although he admitted that the evidence of the cut's impact "is thin at this stage."

"The evidence we have at present would be primarily in the export sector," he said, where the resulting decline in the Canadian dollar has been boosting exporters' Canadian-dollar cash flow and improving their price competitiveness in export markets.

Mr. Poloz reiterated that the non-energy segments of the Canadian economy are starting to assert themselves more strongly in the current quarter, as the impact of the oil shock that were felt in the first quarter and the 2014 fourth quarter begin to fade, and the pickup in non-energy export demand gains momentum.

Story continues below advertisement

"The segments of non-energy exports that we expected to lead the recovery are doing so, and we expect this trend to be buttressed by stronger U.S. growth and the lower Canadian dollar."

Specifically, Mr. Poloz noted that key Canadian export sectors tied to U.S. business investment – including machinery and equipment, building materials, metals and aerospace – are showing "very positive growth."

He repeated the bank's belief that the Canadian economy will bounce back from its estimated flat first-quarter growth starting in the second quarter, with momentum picking up even more in the second half of the year.

Mr. Poloz also defended his controversial use of the word "atrocious" to describe Canada's first-quarter economy in an interview with the Financial Times last month – a term many critics felt fuelled concern and confusion over Canada's economic state.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter