In his last Monetary Policy Report (MPR) before leaving the Bank of Canada, Mark Carney sounded like the triumphant tamer of Canada's troublesome housing market. But now, in the first MPR bearing the full stamp of Mr. Carney's successor, new Governor Stephen Poloz will be forced to admit that the lion is out of its cage.
Wednesday's Bank of Canada Monetary Policy Report will be the first to be entirely written under the direction of Mr. Poloz, who had only been on the job a couple of weeks when the previous quarterly report came out in July. While the financial markets will be carefully assessing what new views Mr. Poloz will bring to this key document, bank watchers may find him delivering a message disturbingly similar to that of Mr. Carney more than a year ago.
The near-term economic outlook is going to look a lot like it did in the middle of 2012 – with disappointing growth and lowered expectations. The central bank tipped its hat on that front in a speech by senior deputy governor Tiff Macklem three weeks ago, in which he said the bank now is looking for GDP growth at an annualized pace of 2 to 2.5 per cent for the third and fourth quarters – far from the 3.8-per-cent third-quarter pace it had previously predicted. The combination of Canada's sluggish growth and recent weak indicators out of the United States suggest that interest rate increases from the Bank of Canada are farther away than previously thought.
That would be problematic enough, if it hadn't arrived amid mounting evidence that the bank's housing problems are back.
In the April MPR – the last one produced wholly under Mr. Carney – housing starts were averaging 177,000 (annualized) for the year to date, slightly below the typical pace of new household formation and much healthier than the dangerously overheated 200,000-plus pace in each of the prior four quarters. Housing prices had flattened. Mr. Carney succeeding in cooling the housing market without using economically stifling rate hikes, relying instead on a combination of persistent rhetoric and, more effectively, the federal government's tightening of mortgage-lending requirements.
The bank was so pleased with the progress on the pesky housing file that it began the report by highlighting this quote from Mr. Carney: "The adjustment in the housing sector is intended and welcome."
And when mortgage interest rates surged over the spring and summer, it seemed just the thing to cement this much-desired gradual housing correction. But it hasn't worked out that way. Since April, housing starts have averaged 194,000 annualized; home prices have risen 3.5 per cent.
Now, Mr. Poloz faces the same dangers Mr. Carney did in early 2012. He has an underperforming economy in need of stimulation (perhaps with an interest-rate cut), but an overheating housing market that poses a long-term risk to economic stability and needs to be chilled (perhaps by an interest-rate increase).
Many observers argue that the recent rebound in the housing market is a last gasp, as buyers rushed in before higher mortgage rates took effect. That may be. But with central bank rate hikes looking further off, that upward pressure on mortgage rates has eased; historically cheap rates may be around to fuel housing demand for many months, even years to come.
While this is a path we went down before with Mr. Carney, the instruments he used to navigate it now look both blunted and not entirely adequate. How Mr. Poloz uses the MPR to describe his view of the road ahead will provide insight into where his own important first steps will land.