Bank of Canada warns buyers of 'early signs' of overheating in housing market

Despite early signs of overheating in Canada's housing market, Bank of Canada Governor Tiff Macklem so far has no plans to raise interest rates until the economy and employment are back on track following the slump caused by COVID-19.

Speaking remotely to the combined Calgary and Edmonton chambers of commerce on Tuesday, Canada's top central banker said that the economy would continue to need monetary stimulus, likely until 2023, even though there are already signs it could be distorting the residential real estate market.

"In that low-for-long world, there are risks that housing could get carried away, so that is something we will be looking at very carefully," Macklem said in response to a question from a member of the remote audience.

Some observers have already expressed worries that the Canadian housing market is rising at an unsustainable pace, leaving critics — including some in the real estate industry — nervous of a boom, followed by a devastating bust once interest rates finally start to rise.

Women and youth hardest hit

But while Macklem also expressed concern, he said that even though the bank predicts the economy will begin to surge by the end of this year, high unemployment among Canada's most vulnerable groups means the economy will continue to need a helping hand.

"Because women and youth hold so many of the jobs in the hardest-hit sectors, they have borne a disproportionate share of the job losses," Macklem told his audience, and he said that many of the jobs that have disappeared will not come back.

Already, long-term unemployment — measured as people who want to work but have not found a job in more than 26 weeks — is currently holding at more than half a million people, a level not seen in the economy in 30 years. Macklem said failure to get those people into jobs will lead to what he called "labour market scarring." In other words, it would result in permanent damage to the Canadian workforce.

He suggested that while the bank is holding rates at rock-bottom levels, in return employers in his audience need to contribute by helping to train the types of employees they needed. That applied especially in the digital economy.

WATCH | COVID-19's unequal economic recession in Canada:

Low-wage jobs were hit the hardest. Not only did technology-related employment not fall as far, but the demand for tech workers has bounced back to levels higher than before the COVID-19 pandemic struck. And he said that employers must help create their own workforce in an economy that is increasingly digital and automated.

"Technology is no longer a sector," Macklem said. "It's every sector."

But he said that rebuilding the workforce and the economy in that new form will be a process of months and years, and he reiterated that there is little fear of inflation and thus rate hikes because there remains plenty of slack in the economy.

Beware 'extrapolative expectations'

But just as low rates have led to increased borrowing by businesses that has helped spur expansion and share prices, low mortgage rates have made it easier for prospective homeowners to bid up the price of houses.

So far, Macklem said, the move toward bigger houses further away from city centres has not been speculation so much as the need for more working — and learning — space for employees who no longer have to commute to the office. Part of the evidence for that is that larger, more distant homes are rising in value, whereas inner-city properties are attracting fewer buyers and renters.

But there are signs that the practical motivation for rising prices may be changing to the kind of speculative frenzy seen in 2016 and 2017 that the government tried to quell with tax measures and stress tests some of which were relaxed last year.

"What we get worried about is when we start to see extrapolative expectations, when we start to see people expecting the kind of unsustainable price rises we've seen recently go on indefinitely, and they're basing their decision on those kinds of assumptions," he warned.

And while he did not describe what kind of actions he would take to stimulate jobs without overstimulating housing, Macklem said the bank would keep a close eye on the housing market and think about how to contain a housing bubble that could lead to future trouble.

"When we see people starting to buy houses solely because they think prices are going to go up, that is a warning sign for us," he told the audience. "We are starting to see some early signs of excess exuberance."

Follow Don Pittis on Twitter: @don_pittis