Bank of Canada's low-rate pledge revives fears of housing bubble
A surprise move by Canada's central bank is expected to boost the housing market but in the long run homeowners may pay the price
The Bank of Canada's surprising signal that it will not raise interest rates any time soon will lift the housing market and give indebted households breathing room, but it leaves many fearing that there will be a hard reckoning.
But the housing market began to cool last year after the country's Conservative government, worried about a potential property bubble, tightened mortgage rules. The news that rates will not be rising has made those bubble fears return.
"This is a double-edged sword," said Laurie Campbell, chief executive at Credit Canada, a credit counselling agency that is funded by banks and other lenders. "It's going to keep more home buyers in the market, but … I worry. Interest rates are going to be stable and [homebuyers] can get a good rate, but are they getting into the market only because of that? Debt is at record levels, and we know consumers are biting off more than they can chew financially, so does this lead to more problems down the road?"
The Bank of Canada has underpinned the housing market by holding its key policy rate at a near-record low of 1 per cent since 2010. But early last year, worried by soaring household debt levels, it began warning its next move would be a rate hike and that Canadians should plan accordingly.
But even as it continued to acknowledge the problem of soaring debt levels in its latest report, it dropped that language, putting more emphasis on the risks of weak inflation and an economy still operating well below potential. The bank's omission of the rate warning left players in the housing market anticipating a renewed surge of strength.
"What is going to happen is rates are going to be lower for longer, and that means it is more appealing for buyers to get into the market," said Kim Gibbons, a mortgage broker in Toronto.