Simone Baribeau of the Financial Times of London wanted to help the Bank of Canada celebrate its 75th birthday this past week, so she delivered a special gift—a head slap to Bank of Canada Governor Mark Carney for daring to suggest that it’s possible to have your cake and eat it too when it comes to financial regulation.
Baribeau argues that Canada’s financial regulators are enjoying a brief moment of glory before the reality of a housing bubble hits. As she points out, home prices in this country have reached levels that appear remarkably similar to the bubble peaks in the U.S. housing disaster. “If prices fall (as they did in the U.S. before the crisis) Canadians stand to face the kind of pain that Americans and Europeans have been facing over the past year, just with a time lag.”
Baribeau has a point. A new research article by the International Monetary Fund looks at home prices in different countries and shows Canadian real estate to be in extremely pricey territory. In terms of house prices-to-rents, Canada is the second-most expensive country among those surveyed. It lags only Sweden and is ahead of Spain, Australia, the U.K.—and, yes, the United States.
Canadian banks appear to be taking refuge in the notion that low interest rates will allow Canadians to carry bigger and bigger mortgages. This is patently absurd, of course—the only way that interest rates will stay low is if the economy stalls, which brings with it another range of problems.
You have to feel a twinge of sympathy for Carney in all this. It’s not his primary job to police Canada’s housing markets. And while it may be his job to put a lid on potential asset-price bubbles, the past couple of years have not been the ideal time to do so. Raising interest rates in the middle of a recession would have been regarded as lunacy.
With the economy looking much better these days, it will be interesting to see what action the Bank of Canada takes in the months ahead. The necessity of taming Canada’s lofty home prices argues for a faster, rather than a slower, rise in interest rates, beginning this summer.
Freelance business journalist Ian McGugan blogs for the Financial Post.