And rates will rise, he added, without providing any new guidance as to when.
“Canadians are now as indebted as the Americans and the British,” he said in an address to the Vancouver Board of Trade. “The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in a decade, despite improving economic conditions and despite the ongoing low level of interest rates.”
Much of the emerging risk to Canadians can be pegged to the relentless rise in housing prices nationwide, he said.
Speaking in the hottest housing market in the country, Mr. Carney explained that sustained cheap credit, while effectively spurring the economy out of recession, has also provoked the run up of real estate valuations.
“One cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand.
“The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear — greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.”
Without using the word “bubble,” Mr. Carney’s warning to authorities and homebuyers alike was clear.
“These are definitely fighting words,” Michael Gregory, senior economist with BMO Capital Markets, said in a note.
Of course, the central bank’s mandate remains controlling inflation, which, as yet, is not sufficient to warrant a policy rate hike.
“As long as price stability, on the ground, is not being threatened, the BoC is not going to throw a single tightening punch,” Mr. Gregory said.
Still, most economists are anticipating rate hikes this year, as short-term economic weakness from supply-chain disruptions gives way and economic growth picks up in the second half of the year.
Canadian borrowers need to ensure they can manage their debt burdens under higher interest rates, Mr. Carney said.
“The impact of eventual increases is likely to be greater than in previous cycles, given the higher stock of debt owed by Canadian households,” he explained.
“At a 4% real mortgage interest rate — equivalent to the average rate since 1995 — affordability falls to its worst level in 16 years. As I have observed, some markets are already severely unaffordable even at current rates.”
But he indicated that he expects a soft landing for Canadian housing, explaining that, for the most part, expansion has been supported by underlying demand forces.
He did note the possibility of an “overshoot in the condo market in some major cities.” And he also underlined the “extreme” valuations in the Vancouver market, where the average price of a house rose in May by 25.7% to $831,555 over a year ago. The average selling price of a Vancouver house is now 11 times higher than the average household income.
For the Canadian market as a whole, Mr. Carney expects moderation as demand is dampened by coming interest rate increases.
The expectation that Canada will avoid a major housing correction, however, is not a consensus view.
“On the topic of housing bubbles though, we think one exists and we expect a major correction in Canada’s housing market of up to 25% over three years,” David Madani, Canada economist with Capital Economics, said in a note.
“If we are correct, then the risks to the economy from negative equity may be greater than ever before, particularly when that growth in debt has been driven by the already most leveraged households.”
-- This is an article from the Financial Post