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Home Prices in Canada Are Too Rich for Higher Rates, Ex-Central Banker Says - BLOOMBERG
BY , Bloomberg News
Paul Beaudry, deputy governor of the Bank of Canada, speaks at the Bank of Canada headquarters in Ottawa, Ontario, Canada, on Thursday, June 2, 2022. The Bank of Canada took another aggressive step in its hiking cycle, raising its policy interest rate by 50 basis points for a second straight time and warning that it may act "more forcefully" if needed to tackle inflation. , Bloomberg
(Bloomberg) -- Current home prices in Canada can’t be justified if medium-term interest rates stay elevated, a former Bank of Canada official said, underscoring the risk to one of the country’s most important sectors.
Paul Beaudry, who spent four years on the central bank’s rate-setting committee, said the outlook for the housing market remains highly dependent not only on the policy rate, but on longer-term fixed rates. If they don’t come down, “then it becomes much more difficult to support these valuations,” he said on BNN Bloomberg Television.
The benchmark price of a home in Canada was C$757,600 ($554,600) in August, up 40% in five years — with most parts of Ontario and Quebec seeing much larger price increases. Canadian homeowners, unlike their US counterparts, don’t have the option of locking in rates for 30 years. Most borrowers have rates that are fixed for five years or fewer, or they have floating-rate mortgages that rise and fall with the Bank of Canada rate.
That has left many households stretched after rates jumped in the past 18 months. The five-year Canada government bond yield has risen nearly 150 basis points since hitting its 2023 low in March, putting significant upward pressure on mortgage rates. Royal Bank of Canada economists wrote last week the overall cost of home ownership in Vancouver, Toronto, Montreal and other cities is “still near all-time worst levels.”
Beaudry, who left the central bank in July, said his former colleagues will remain worried about core measures of inflation until they ease closer to the 2% target. “If they don’t come down, that really brings a danger that maybe there is a point where the Bank of Canada will need to tighten more,” he said.
