The following is a transcript of the question and answers about the housing market from BNN’s interview with Bank of Canada governor Steven Poloz.
Greg Bonnell: We know that Toronto home prices are up 33 per cent, we know that Vancouver has cooled off, we know about the sales volumes. So, what is it when you look at the GTA — and you did discuss it at length — that concerns you the most?
Steven Poloz: Well, there’s no question that I don’t want to diminish the concern that we have about the housing market, particularly in [the] GTA. Certainly there are strong fundamentals in that housing market. The economy itself [in the GTA] is growing at four per cent to five per cent. The population is growing because of immigration and because of people just moving there. So there is fundamental demand for housing and as we know a reasonable tight supply situation — especially for single-family homes. So that combination is going to give you higher prices, but you can only explain so much, even if you got heroic about it. Nobody can explain 30 per cent. That suggests to us that some of the demand is purely speculative. It’s investor demand and that, of course, is very risky behaviour because house prices can go down as well as up. So I did take a moment to remind people of that. I think individuals, non-speculators who are buying homes, are paying that price. They need to be thinking of the risks involved from their own personal point of view too.
GB: Now, at half a per cent the key rate of the Bank of Canada is very accommodative. If you went up another half or even quarter, you’d still be in a very accommodating space as far as the cost of borrowing. If this is speculative behaviour, couldn’t we take a little froth out of the market by raising the key rate?
SP: Don’t think so. The fact is, when you are looking at making an investment you think will make you 20 per cent or more over the next 12 months, and you have to borrow the money to make that investment, is a quarter point or a half a point going to make a difference to that decision? I don’t think even a five percentage point difference would take you away from that. What you’d have to be thinking about is, "Is the context changing? Is that going to take me out of my investment decision?" And that is a much more gradual and more macro process. So, no. In the end, in fact, borrowing isn’t even part of that equation. If we look at the mortgage data, mortgage outstanding is only growing by about six per cent a year. So, it’s not one of those credit-fuelled interest rate driven kind of situations. It’s just sentiment.
GB: In terms then of the other end of the spectrum, if you were to raise off of half a per cent, what kind of damage could we do to the economy given the state we’re in right now? We’ve had some pretty good numbers from the beginning of the year but you’re not completely sold.
SP: I’ve characterized this as riding a bicycle up a hill. People have [said to] me, “So, interest rates don’t seem to be doing much, the economy is not growing very fast,” and now, of course, it has picked up in the last few months. We’ve raised questions about how sustainable that is. We have to see it before we are sure of it. I think the important thing is that the sustainability comes in a broader package. So we have to watch for all the bits and pieces, investments and exports, to contribute their part. We still think we’re pressing against high headwinds, or, if you like, riding our bike up the hill, and if those headwinds start to dissipate, then we’ll know that we’ve got the situation more in hand. But as it stands, there is too much uncertainty. [It’s] just a little too soon, to be reaching that conclusion.
GB: CIBC’s Benjamin Tal, their deputy chief economist, I know he watches the Bank of Canada activity closely, today he was on BNN and he said that when it comes to trying to stimulate business investment, stimulate growth, he actually used the word ‘impotent’. He said, "The BoC is impotent to stimulate credit, it’s only stimulating sub-prime mortgage market lending.” What do you say to that?
SP: Like I said a moment ago, it may be on the margins stimulating some sub-prime behaviour. But in the absence of a speculative posture on what prices are likely to do, none of that would be mattering. So, the speculation grows and it’s fuelled by actual money, not by credit. It’s got very little to do with the cost of credit. The one thing that people need to remember is that housing is not like a regular financial market. So, if you want to speculate on the stock market you could continually incrementally add to your position in small bits. Well, in housing they come in pretty big chunks. It reaches a point that if you don’t have the money and you’re borrowing for that, well, they’re not going to lend it to you because it’s just too big of a number. I think that’s why the Vancouver market rolled over some before the tax moves that were designed to moderate it.
GB: You think that a market can just exhaust itself then?
SP: It’s like exhaustion but it happens more likely in housing because it’s in these big chunks. You actually in the end have to buy the house. You can’t just add 10 per cent to your position on housing. You actually have to come across and buy it. At some point the price tag becomes such that [you say], "I can’t get it across the finish line." It becomes that gradually things peter out at the top part of the market. And then those expectations start to dissipate. What we’ve seen in Vancouver is not a correction but a moderation, a calming down of the situation. I think that’s partly due to the size, but also due to the policy changes.