Former Bank of Canada Governor Stephen Poloz thinks the heat in the domestic housing market is an acceptable trade-off to take after the Canadian central bank and its global counterparts slashed interest rates in a bid to stave off the worst of the potential pandemic-induced carnage.
“We cut interest rates in order to boost the economy. Well, if we’re not going to have a hot housing market, we won’t have any reaction at all to [low rates], and so that’s all part of the side-effect of the job you’re there to do,” Poloz, now a special advisor at Osler, Hoskin & Harcourt, said in a television interview Thursday.
“If the side-effect is a hot housing market, that’s one I’ll take every day.”
Under Poloz’s watch, the Bank of Canada slashed its key interest rate three times in the early days of the pandemic, dropping the benchmark to 0.25 per cent from 1.75 per cent over the course of March 2020 alone.
The Bank of Canada under current Governor Tiff Macklem has signaled it intends to keep the policy rate at that effective lower bound until at least 2023 as it looks for signs the economic recovery has taken root and inflation conditions are returning to normal.
While much has been made over the heat in some of Canada’s largest housing markets, with prices in Toronto up 15 per cent year-over-year and Vancouver benchmark prices up nearly seven per cent year-over-year, Poloz said he has faith the strong underwriting standards of domestic mortgage lenders will prevent the real estate market from becoming a significant financial vulnerability.
“We have really good rules around mortgage lending, and we have excellent banks that know what they’re doing, and in the end that mortgage loan is between the borrower and the lender, I have a lot of confidence in that underwriting process,” he said.
While the benchmark Bank of Canada rate remains at historic lows, gyrations in the bond market have drove mortgage rates higher. The Canadian five-year bond yield, which underpins most long-term fixed mortgage rates, rose to 1.01 per cent as of Thursday, its highest level since February 2020.
Poloz said those bond market dynamics could take some of the pressure off policymakers to intervene with higher rates, as mortgage lenders hiked their lending rates to reflect the higher costs.
“Rates are already naturally rising, and I think what we’re going to see is that the bond market will lead the central banks up in due course, we might have a really steep curve for a while. That’s going to begin to hit the typical five-year mortgages in due course,” he said.
Ultimately, Poloz said the exuberance in the Canadian market could lead to further speculative action, but thinks that’s a relatively small price to pay when it comes to cutting rates.
“It’s hot, and we could see signs of speculation, but we have to accept that because otherwise we would have a really, really bad recession,” he said.