Bank of Canada takes stance on housing bubble

Bank of Canada takes stance on housing bubble

A Bank of Canada official called talks of a Canadian housing bubble premature in a speech in Edmonton Monday, adding higher interest rates are not the solution to cooling the current surge in housing demand and prices. 

"If the bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession," said David Wolf, an advisor to Bank of Canada governor Mark Carney. "As a result, it would take longer for economic growth to return to potential and for inflation to get back to target."

The central bank's comments came on the heels of the CMHC's latest report on housing starts, which showed a 6.6 per cent jump in urban starts across Canada compared to November. They also follow federal finance minister Jim Flaherty's recent comments about introducing new rules to cool the housing market.

In his speech, Wolf said housing bubbles are usually caused by credit expansion as opposed to temporary factors like low interest rates and pent-up demand, and these factors cannot continue to sustain the high numbers of sales and prices seen in Canada over the past few months. Wolf also said the central bank is monitoring the housing market closely, adding it required "vigilance, not alarm."


  • Lachman Balani 2010-01-25 4:59:29 AM
    Variable mortgage interest rates are so low that a mortgage payment now puts more towards the principal than the interest, so it is a good time to buy homes. However it is the moral duty of the mortgage agent to ensure the borrower does not take on so much debt that in case the rates go back up, the borrower is unable to make the mortgage payments.Same goes for the real estate agent. The borrower should also do his due diligence and so should the underwriters of the lending institutions.
    Runaway interest rates like in the 80s seem unlikely to come back soon but maybe just maybe the prime rate might go back to the 6% mark as it was in 2008, though the 4-4.5% range of 2004 seems more likely by 2011.
    But... qui sait?
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  • erica 2010-01-27 1:05:22 PM
    sounds like a bunch of bs to me
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  • Sergio Bogani 2010-01-30 4:35:29 AM
    Ever wonder when someone asks if there were signs of this collapse we face now? Did anyone see it coming. DUHHHH! I agree that as Mortgage Agents we have an obligation to ensure our clients take on mortgages they can afford. So do the ratio calculation. If they are buying a new home with 5% down calculate what their ratios would be in 5 years if the rate was at 6.5% (actual normal rate in the early millenium). Ask them what their salary base was for the past 5 years. If they are already at 40% TDS and they expect their salary to increase enough that the TDS in 5 years will be either lower or the same at 6.5% then by all means these clients should get their home. However if they have had steady salary for the past 5 years and their total increase in salary amounts to 3% to 5% total and their TDS with 6.5% in 5 years is at 55% based on those numbers then guess what? Maybe they can't afford that home.
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