More fuel thrown on the housing bubble fire

More fuel thrown on the housing bubble fire

More fuel thrown on the housing bubble fire

Despite evidence to the contrary, one international economic body says Canada must raise interest rates sooner rather than later to avoid a housing bubble collapse.

The Paris-based Organization for Economic Co-operation and Development’s prescription for monetary policy would be: An increase in the benchmark rate of a quarter of a percentage point in the autumn, and similar increases each quarter through to the end of next year, leaving the benchmark overnight target at 2.25 per cent.

According to the OECD, this would likely be a big enough increase to cause prospective homeowners to think twice before buying at current inflated prices.

There are consequences to this action however, including pushing the Canadian dollar upwards, as the Federal Reserve Board has made a conditional pledge to leave U.S. rates extremely low until the end of 2014.

This is second time in a year that the OECD has called on Canada to raise interest rates. Last year their calls went unheeded by Mark Carney and the Bank of Canada.

According to Peter Jarrett, head of the Canadian division at the OECD, the U.S. recovery is gaining traction, a boost for Canadian exporters. As a result, the economic slack in Canada left from the recession is fast running out. “At most, there is a modest amount left,” said Jarrett.

That spare capacity is what has allowed the BoC to keep the benchmark interest rate at an emergency setting, even as the country’s economy replaced the jobs lost during the recession and domestic demand surged.

With rising debt levels the federal government has made recent moves to tighten mortgage lending, but Jarrett said he doubts further prudential measures would do much to cool lending in Canada’s hottest housing markets, including Toronto, Ottawa and Montreal. “That’s why we call for the removal of more [monetary] stimulus in the autumn,” he said.