BUSINESS

Canadian Housing 'Bubble' Fears Are Baseless, Poloz Says

04/28/2015 03:43 EDT | Updated 04/28/2015 04:59 EDT
CP

There is no Canadian housing bubble, the central bank governor assured Parliament Tuesday, despite the bank’s own estimate that home prices are overvalued by as much as 30 per cent.

“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz told a House of Commons finance committee, according to the Globe and Mail.

The years-long real estate tear is based on continued consumer demand, thanks to low interest rates, and not the type of speculative buying that characterizes an asset bubble, he explained.

“Our housing construction has stayed very much in line with our estimates of demographic demand,” he said.

The bank’s Financial System Review published last December suggested the housing market is between 10 to 30 per cent overvalued.

But Poloz told the committee that doesn’t mean prices will have to drop by the same amount to correct the market, as some observers have suggested. Instead, Poloz said rising incomes, as the economy gains traction, could be enough to make housing more affordable.

The bank cut interest rates in 2009 to historical lows in order to spur consumers into taking on more loans to stimulate the economy. They began to rise for a period but Poloz surprised market watchers earlier this year by cutting the rate to 0.75 per cent to offset negative economic impacts of tanking oil prices. He predicted first quarter growth would be “atrocious” as a result of cheaper crude.

The bank governor defended his decision to cut rates Tuesday, encouraging more borrowing even though Canadian debt loads are at an all time high of 163 per cent of income. The impact of low oil prices has already hit some sectors, including household spending, Poloz said.

“The level of indebtedness, as measured by the ratio of debt-to-disposable income, continues to edge higher. It is likely to rise further as the decline in gross national income caused by the drop in oil prices works its way through the system,” Poloz said in his opening statement.

“On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability. However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains.”

Poloz has said that though the economy likely saw no growth in the first quarter of the year, he expects growth to rebound to 1.9 per cent this year as the impact of the oil price shock subsides after the second quarter.

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