TORONTO (Reuters) - Bank of Canada Governor Tiff Macklem’s reassurance that interest rates will remain low for at least two years could unleash a wave of speculative demand in the country’s hottest housing markets, realtors and mortgage brokers warned.
Canadian authorities are hoping a raft of stimulus measures and decade-low interest rates will spur credit growth and housing investment, helping offset the economic hit from the coronavirus pandemic and oil prices hovering near multi-year lows.
“If you’ve got a mortgage, or you’re considering to make a major purchase ... you can be confident that interest rates will be low for a long time,” Macklem told reporters after the central bank held rates steady on Wednesday.
That comment could boost housing demand in an economy with an unemployment rate close to the highest in decades and consumer insolvencies expected to spike in coming months, brokers said.
“In a country engaged in the most spectacular stimulus program ... the suggestion that everybody should run out and buy a house or a car is a bit much,” said Ron Butler of Toronto-based Butler Mortgage. His office saw record inquiries this week even before Macklem’s statement.
Macklem’s comments on Wednesday also seemingly put the central bank at odds with the government’s mortgage agency, which last month tightened mortgage insurance rules for riskier borrowers to help curtail “excessive demand and unsustainable house price growth.”
In an emailed response on Thursday to a Reuters request for comment, Macklem said the Bank of Canada had highlighted that high household debt levels were a vulnerability but that the priority now was supporting a recovery and the return of jobs, which also ensures borrowers are able to pay their mortgages.
Supporting the recovery and reducing the vulnerability of high debt levels are “entirely aligned,” he said.
Evan Siddall, chief executive of the Canada Mortgage and Housing Agency, tweeted on Thursday that low rates and stricter underwriting could co-exist.
“Surely you can reconcile the need for low rates to stimulate borrowing by people with strong credit characteristics with a policy that restrains excessive borrowing by those with weaker credit characteristics,” he said.
But unprecedented levels of government stimulus have made borrowers’ true economic status less clear, Butler said.
Canadian home sales rebounded sharply in May and June following the weakest April on record, data from the Canadian Real Estate Association showed. In Toronto, Canada’s biggest city, home prices jumped nearly 12% in June from a year earlier.
The average sale price in June for all home types was C$930,869 in Toronto and C$1.03 million in Vancouver.
Government support - worth about C$230 billion ($170 billion), according to the Department of Finance - and loan deferrals by banks have bolstered home prices, and pushed expected declines toward the end of this year or early 2021, said Nathan Janzen, senior economist at Royal Bank of Canada.
“Then we will see the true health of household balance sheets,” he said.
People buying properties could now find themselves with negative equity in their homes if those declines materialize, said Vancouver-based Oakwyn Realty agent Steve Saretsky.
CMHC last month forecast home price declines of between 9% and 18% over the next 12 months.
“If you buy a home today, you have to be extremely confident in your work situation,” Saretsky said. “I don’t think you have a free market when you have mortgage deferrals and unlimited quantitative easing and C$2,000 (unemployment) checks.”
John Pasalis, president of Realosophy Realty, said that while it was normal for central banks to encourage borrowing during economic downturns, Macklem’s explicit message to take on mortgages would likely encourage speculative buying.
“When investors dominate the market, prices get inflated beyond where they should be,” he said.
Reporting by Nichola Saminather; Additional reporting by Kelsey Johnson; Editing by Denny Thomas, Richard Chang and Peter Cooney