Scotiabank Head of Capital Markets Economics Derek Holt doesn’t think the Bank of Canada should be able to wash its hands of responsibility for the massive run-up in residential real estate prices.

In a television interview Tuesday, Holt said the Canadian central bank should take some ownership for the surge in home prices it helped foster with its rock-bottom interest rate policies and continued messaging that its rate regime will be in place for the medium-term.

“I wouldn’t fault them for having policy interest rates that are essentially zero now, because we still have about 600,000 unemployed Canadians who had a job before the pandemic, and we still have inflation below their target,” he said. 

“I have more of a bone to pick with the fact that they continue to guide heavily-indebted Canadians who are buying all these homes to believe that the cost of borrowing won’t increase for years to come.

“I think they’re overreaching in that promise, and they should have changed their narrative ... as vaccines began to arrive and as fiscal policy really started to emerge last fall.”

The Bank of Canada has signalled it will keep its benchmark rate at the effective lower-bound until at least 2023 to support the country's economic recovery through low borrowing costs.

However, while the intent is to allow businesses to survive the worst ravages of the pandemic, the knock-on effect results in cheap borrowing costs for house-hungry consumers.

That’s helped drive the average price of a home in Toronto and Vancouver north of $1 million through the course of the pandemic, while bedroom communities of the nation’s two-largest cities have seen double-digit percentage price gains.

That’s sparked a spirited debate on Bay Street as to whether further macroprudential measures should be put in place, including a potential capital gains tax on primary residences or tweaks to the mortgage stress test.

While the Bank of Canada has acknowledged the recent run-up in prices, the central bank has said it is keeping a close eye on the speculative activity which is driving home prices higher.

In spite of the rock-bottom interest rate environment, there are signs mortgage borrowing costs are ticking higher. The yield on a benchmark Canadian government five-year bond – which underpins rates on lending products like a five-year variable rate mortgage – has been rising steadily due to broad bond market dynamics.

Holt said that an uptick in bond yields could take some of the pressure off the Bank of Canada to raise its benchmark rate earlier than expected, but it would still be important for the central bank to signal to Canadians that rates could rise earlier than initially expected.  

“We still have to, in my opinion, guide Canadians to believe that interest-rate risk can cut in both directions: that they may go up earlier than anticipated, in part because of very, very strong growth and strong fiscal policy,” he said. “I would prefer to see the Bank of Canada guide that they may be leaning towards rate hikes a bit earlier than they had previously guided in order to temper the market.

“I do think, however, that we’ll get a cooler market through some of the forces that are already at play.”