Bank of Canada's Poloz dispels speculation of housing bubble

The Bank of Canada’s top brass assured a parliamentary committee that Canada’s bloated housing market has not become a risky asset bubble, despite the central bank’s own calculation that house prices nationwide are roughly 20 per cent overvalued.

“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble. “Our housing construction has stayed very much in line with our estimates of demographic demand,” he said. “There’s no excess.”

This despite the central bank’s own estimate, published last December in its Financial System Review, that Canada’s housing market is overpriced by between 10 and 30 per cent. Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession. “This is one of the byproducts of what we’ve been through. It’s not something that happened simply by itself,” he said. “It would be very unusual to have that and not have a degree of overvaluation.”

Mr. Poloz added that the overvaluation doesn’t necessarily mean the market is in need of a 10-to-30-per-cent downturn to bring it back into balance. He said that rising incomes as the economy gains momentum could help close the affordability gap, without a sharp drop in home values.
Senior Deputy Governor Carolyn Wilkins added that the central bank still believes Canada’s overall housing market is “headed for a soft landing,” despite the sudden oil-shock upheaval that threatens considerable instability in Alberta. “We’re not expecting whatever transpires in Alberta to create spillovers that would be, from a financial stability perspective, worrisome for the rest of Canada,” she said.

In its Monetary Policy Report published two weeks ago, the Bank of Canada expressed concern that the oil shock’s impact on Alberta’s housing market, as well as the continued price booms in Toronto and Vancouver, “suggest a risk of a correction in these markets.” It added that if all three of these major markets were to suffer a downturn simultaneously, “the spillover effects to the rest of the economy would be significant.” However, Ms. Wilkins stressed that historically, regional housing downturns typically remain localized events. “We don’t see that regional crashes tend to spread to other areas.”