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Canada’s Housing Problem


Stephen Poloz, Governor of the Bank of Canada, thinks Canada may have a housing problem on its hands:

On the home front… high house prices and record household debt remain the most important “vulnerabilities” in the Canadian financial system – a problem highlighted in reports this week by both the International Monetary Fund and the Organization for Economic Co-operation and Development.
The OECD, for example, said that 40 per cent of Canadians now live in cities where home prices are “seriously or severely unaffordable,” such as Vancouver and Toronto.

It’s more than a little strange that the head of the country’s central bank would now be so concerned with these developments. Poloz is in control, after all, of the one agency that has worked the hardest to promote them.

Since taking over from Mark Carney the role of head of the Bank of Canada it has mostly been business as usual for Poloz. The BoC’s prime lending rate is still pegged at 3.25%, the lowest level since 1955. Throw inflation into the mix and real borrowing rates are close to zero, as they have been for the past five years.

Canada’s real estate boom isn’t such a big surprise to those that see the BoC’s interest rate policy as too loose. Banks have access to credit and are willing to lend. Borrowers, especially home buyers, are willing to take advantage of historically low interest rates to finance what will likely be the biggest purchase of their lives.

High housing prices and nosebleed levels of debt should be what you would expect from this situation!

The really troubling aspect of Poloz’s concerns is that he doesn’t see the central bank as the cause of these problems. It’s almost as if the housing boom, looming bust, and debt problems came from nowhere.

Better the devil you know, so to speak, but maybe having a central bank governor who understands his role in promoting the boom would be the better option. Of course, not having one at all would be even better.

(Originally posted at Mises Canada.)

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, and Academic Vice President of the Ludwig von Mises Institute of Canada.

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