Housing bubble could bring end to low interest rates
OTTAWA - The Bank of Canada's efforts to spark a rebound in the domestic housing market may be working too well.
A new TD Bank report shows house sales and prices have defied gravity during the severe economic recession and are poised to end 2009 at higher levels than they were before the downturn hit Canada last fall.
"After plummeting by nearly a third in the second half of last year, the seasonally-adjusted level of sales had climbed back by 61 per cent as of August," the report notes. That is more than pre-recession levels.
The paper goes on to say that the average price of homes sold is also rising and will likely end the year at $310,000, or 2.1 per cent higher than at the start of 2009.
Economists credit the central bank's policy of slashing interest rates the past year with reviving a dormant housing market -- perhaps too much, too fast -- leading to speculation that bank governor Mark Carney may have to reverse course and raise rates earlier than expected.
"We're not calling what we see presently a housing asset bubble," said TD economist Grant Bishop,
"We think it will moderate, but should it fail to moderate, it will no doubt be concerning to the bank."
Talk about exit strategies as the global economy improves has been building for months, particularly since most governments have ramped up spending beyond comfort levels and central banks have cut rates to the bone. Low interest rates, along with a loosening of controls, is largely blamed for the U.S. housing bubble earlier this decade that eventually triggering the global financial crisis.
U.S. Fed officials have recently begun to speculate about the proper time to raise the policy rate from zero, and European Central Bank policy-makers have also sounded more hawkish on interest rates, even though none country has moved to tighten.
On Tuesday, Australia, which never fell into a technical recession, went beyond talk by increasing the policy rate by a quarter point to 3.25 per cent, citing rising home prices in that country as a key concern.
The Bank of Canada has issued what it calls a conditional commitment not to raise its policy rate of 0.25 per cent -- the lowest practical level -- until at least July, but last week Carney went out his way to stress the pledge had plenty of conditions.
Devoting three paragraphs on the subject in a speech in Victoria, Carney concluded the section by stressing: "In short, it is an expectation, not a promise. If circumstances affecting the outlook for inflation change materially, the conditional commitment would change."
That cautionary language was closely observed by economists, who say it is not out of the question for the bank to start signalling it may start raising rates before its expectations.
But it would take housing prices and sales continuing to soar in the face of higher unemployment and a weak economy to cause the central bank to reverse course, argued Douglas Porter, deputy chief economist with BMO Capital Markets.
In a sense, that would be a perverse reaction, he added, since spurring home sales and other interest-sensitive sectors of the economy was what Carney had in mind when he started slashing rates in the first place.
"The bank will take asset prices into account," he said, "but I think they've got to see some pretty convincing signs the broader economy is recovering and recovering on its own before they start to move rates aggressively."
The present signals are going in the opposite direction. The flat growth reading registered in July shows the economic recovery is more fragile than robust, and many say the concerns over a so-called double-dip -- where growth slows significantly after an initial brief spurt -- have risen.
As well, the Bank of Canada is still dealing with negative inflation and has expressed no concern prices will get out of hand in 2010.
Finance Minister Jim Flaherty also seemed to dismiss talk of an exit strategy from stimulus for Canada, reaffirming Wednesday that the government intends to complete its two-year spending plans outlined in the January budget.
The exit from stimulus will come after that, he said.
"We have to make sure we stop the stimulus spending as planned, at that's at the two year mark. Then the funding will stop," he said.