Another day, another opinion about a potential housing crash is voiced; this time, however, it’s optimistic and the source is influential.
Governor of the Bank of Canada, Stephen Poloz, told reporters in New York Thursday that the BoC does not believe the type of drastic rise in mortgage rates or unemployment that would contribute to a housing crash will materialize, according to the Globe and Mail.
“The risk comes when some catalyst sets off the vulnerability,” Poloz said. “In this case it would be, let’s say, a rise in unemployment, a significant one, where it makes people have difficulty paying for their mortgage, or a rapid rise in mortgage rates, neither of which we’re expecting.”
His comments come on the heels of a central bank report that estimates housing in Canada is overvalued by 10-30 per cent. However, the report also pointed to the shortcomings of the methodology used to arrive at the estimation.
“There are 43 major house price cycles in this sample, which allows the estimation method to obtain more precise estimates of the model’s parameters. However, like other models, it suffers from a number of shortcomings ,” the bank’s Financial System Review states. “For instance, house price fluctuations in each country are determined solely by changes in demand conditions (i.e ., real, per capita disposable income and a long-term government bond yield) . The supply side is not explicitly modelled . Constant cross-country differences are captured by country-specific intercept terms, but differences that vary over time are not included.”