At the start of 2015, the Bank of Canada’s benchmark interest rate had sat steady at 1 per cent for more than four years.
Then economic headwinds hit. By mid-2015, the central bank had halved the benchmark rate. The economy was the reason, but interest rates are a potent medicine, and there were side effects.
Most notably, a rapid real estate boom ensued, centred in Toronto and Vancouver. Two years later, when the Bank of Canada started to inch rates higher, real estate prices in Toronto had jumped by 45 per cent and Vancouver was up 35 per cent, as measured by the Teranet house price index.
Bank of Canada governor says red-hot housing market showing signs of speculative behaviour
The medicine of interest rates, however, works in both directions. After that first mid-2017 rate hike, prices in Toronto topped out, and Vancouver prices crested within a year, following additional Bank of Canada hikes.
The above history is often forgotten when looking back at the 2016-17 housing mania, because there was a flurry of other well-publicized interventions.
Governments in British Columbia and Ontario taxed empty homes, foreign buyers and speculation. And in late 2017, the overseer of the big banks, the Office of the Superintendent of Financial Institutions (OSFI), established a stress test for mortgage buyers who put at least 20 per cent down, representing the majority of deals. The new stress test was a sudden blast of financial reality aimed at ensuring stability among the banks, but it carved into real estate demand.
All these measures made a difference as they piled on in succession. OSFI’s move had a real impact. But it’s arguable that the Bank of Canada cutting its benchmark rate in 2015, and then the series of increases several years later, were the key factors in sparking, then cooling, the housing market.
Which brings us to this wild spring. You may have heard that housing is getting more expensive. And this time, as everyone knows, the exuberance is not limited to the biggest cities. It is everywhere. More places are going haywire at the same time – seeing annual price gains of more than 10 per cent – than ever before.
Problem is, the one entity that could really do something about it is busy thinking about bigger things. The Bank of Canada, even as Governor Tiff Macklem makes vague nods towards “signs of” speculative behaviour, is focused on a pandemic economy in convalescence. Things are looking up but there’s a long way to go. In late April, the central bank suggested rates could rise in 2022, rather than 2023.
The bank’s caution is wise. Low interest rates are necessary to ensure the sickened economy can reliably recover. Businesses need to be able to borrow, to build for the future. But the side effect – the overheated housing market – remains.
And this time, unlike in 2016-17, governments have not taken action. Ottawa in its recent federal budget unveiled a small and long-mulled tax on foreign owners of empty homes, but experts believe it won’t make a difference; in any case, it is months away from being reality.
Only OSFI has taken action. The banks regulator in early 2020 considered loosening the stress test. Then the pandemic hit and those plans were put on hold. The Bank of Canada slashed its rates as low as possible and real estate, after a brief swoon, boomed.
A month ago, OSFI decided to slightly tighten its stress test. The move would cut the borrowing power of the majority of buyers by roughly 4 per cent. A call for comments closes on Friday, and the change is to be in force June 1.
But with the Bank of Canada’s hands tied, OSFI’s decision is too timid.
The regulator, looking to protect the banks, had the opportunity to slow the flood of interest rate medicine into housing. The housing market, OSFI said, puts Canada’s banks at “increased financial risk.” Research from the Bank of Canada in April showed the percentage of uninsured mortgages carrying huge debt burdens is higher today than in 2017.
There’s another problem, too. Increasing and reducing interest rates has always been a blunt instrument. One part of the economy or country might need it; another may not. Interest rate changes are not a nuanced measure.
With the latest surge in housing prices, it is becoming clear there needs to be additional policy measures that can be relied upon when things get too hot. Right now, OSFI’s stress test is the only one on offer – and it needs to become more stringent.
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