World News

Low rates, warming housing market – is it deja vu for Bank of Canada’s Stephen Poloz?

By Fergal Smith and Kelsey Johnson

TORONTO/OTTAWA (Reuters) – Bank of Canada Governor Stephen Poloz looks ready to end his term where he began, setting interest rates near historic lows to support the broader economy at the risk of stoking higher prices in a housing market that is heating up.

Following the Federal Reserve, the Bank of Canada on Wednesday slashed its key interest rate by 50 basis points to 1.25%, its biggest move in more than a decade, to help tackle the economic effects of a coronavirus outbreak.

Money markets expect the central bank to ease further, seeing a 1% rate by June when Poloz is due to step down after seven years. Ironically, that would be the same rate level Poloz inherited when he took over in 2013. At the time household debt as a share of income, at about 164%, was seen by the central bank to be the biggest risk to financial stability.

Now that measure has climbed to a record of more than 175% and home prices have started to rise again. The Bank of Canada bucked the global trend of easing in 2019, wary that a reduction in rates could amplify risks to the economy from record levels of consumer debt.

Lower interest rates “will further fan the flames of housing markets,” Brian DePratto, a senior economist at TD Bank Group, said in a note.

In 2016, a year after Poloz eased rates by a total 50 basis points in the wake of an oil-price crash, the housing market went into bubble territory. Much of the froth was in Vancouver and Toronto, two major cities that have benefited from high employment and immigration.

Data on Wednesday showed that Toronto home prices surged in February by the most in almost three years to a near-record and sales soared by nearly 50%.

“The Bank of Canada is between a rock and a hard spot here,” said Elton Ash, regional executive vice president at real estate agency RE/MAX of Western Canada. “They’ve got to react but how will that affect household debt?”

Measures to reduce risky mortgage lending and effects of the coronavirus might make it less likely that the housing market will ignite this time.

Still, this is not likely the way Poloz wanted to make an exit, said Benjamin Tal, deputy chief economist at CIBC Capital Markets.

“I’m sure that he didn’t want to end his term on this note… But the virus is not waiting for anybody.”

(Reporting by Fergal Smith in Toronto and Kelsey Johnson in Ottawa; Editing by Andrea Ricci)