Bank of Canada’s Rogers says supply key to solving housing problem

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Rising interest rates have started to take some of the exuberance out of the housing market

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May 05, 2022 • 1 day ago • 4 minutes read • 69 comments Carolyn Rogers, Lieutenant Governor of the Bank of Canada. Carolyn Rogers, Lieutenant Governor of the Bank of Canada. Photo by Justin Tang/Bloomberg

The Bank of Canada’s Carolyn Rogers, who has spent much of her career as a regulator and policymaker trying to keep the country’s housing boom from turning into a bust, said the only thing that will moderate prices is more homes.

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“We have to solve the supply problem,” Rogers said in an interview this week, her first since she replaced Carolyn Wilkins as Gov. Tiff Macklem’s No. 2 in December. “We keep trying these different things to curb demand and Canadians still want houses. We have immigration, (and) we have a strong economy.”

Rogers headed British Columbia’s financial services regulator from 2010 to 2016, a period when the average home price in Vancouver rose to over $1 million, despite the provincial government taxing foreign buyers and local government levying an underutilized property tax. Rogers left BC to join the Office of the Superintendent of Financial Institutions (OSFI), where she helped federal banking regulators develop the minimum qualification rate, or “stress test,” one of Ottawa’s many futile attempts to curb housing demand.

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“We have a culture where housing is a kind of rite of passage. It’s a sign of success,” Rogers said. “I lived in Europe for a few years and apartments don’t have the same status in the economy or in this society. But in Canada you get married, you buy a house, you have children – that’s what you do. Everyone wants a house.”

We have a culture where housing is a kind of rite of passage. It’s a sign of success… Everyone wants a house

Caroline Rogers

Rogers acknowledged that the increase in housing supply will not happen overnight.

Canada Mortgage and Housing Corp. came to a similar conclusion in his first report in a series examining how the country’s housing shortage is affecting affordability. According to the report, housing starts in Canada’s largest cities, particularly Toronto, have lagged population growth since at least 2003. CMHC noted that the situation in Toronto, where the median home price is also now more than $1 million, has deteriorated in recent years.

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Canada’s elevated home prices are not solely a supply phenomenon. A decade of unusually low interest rates fueled fundamental demand, which Rogers identified as a key driver. Now that interest rates are rising, some of the exuberance is being drained from the market. It’s a dynamic already playing out in Toronto, where home sales and prices fell in April, and nationally, as the median price of a home fell 2 percent month-on-month to $796,000 in March.

The average home price in Toronto is over $1 million. The average home price in Toronto is over $1 million. Photo by Laura Pedersen/National Post files

“The growth in home prices in Canada is unsustainably strong,” Rogers told an audience after a speech in Toronto on May 3. “It wouldn’t be a bad thing for the economy if house price growth slowed down a bit, and we expect that to happen as interest rates rise.”

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The Bank of Canada raised its benchmark interest rate by a quarter point on March 2, by a half point on April 13, and Macklem hinted during his testimony before the House Treasury Committee last month that he was likely to raise the overnight target by another half point will be when policymakers finalize their next round of deliberations on June 1st. Lenders’ base rates are set by the Bank of Canada’s reference rate, causing mortgage rates to rise with each increase. The Financial Post estimated that after those rate hikes, homeowners could raise their adjustable-rate mortgages to 2.35 percent, since Canadians would have to pay $2,613 a month for a $500,000 mortgage.

The best we can do – even for highly indebted people – is to bring inflation down

Caroline Rogers

In the interview, Rogers said she hopes the money that’s been poured into housing during the pandemic will flow into other segments of the economy, generating investments that create more productive growth. As borrowing costs rise, the pressure Canadians are feeling to keep up with mortgage payments could potentially weigh on the goods and services sectors as the economy recovers.

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Rogers said she and her colleagues at the central bank will be monitoring the additional mortgage pressures Canadians face, their ability to service debt and the risks these pressures pose to the broader financial system. She added that the central bank has strong visibility on these issues because of its partnership with OSFI, noting that some demographics would be more affected than others.

“We know there are a lot of Canadians who are really overworked,” Rogers said. “Usually it’s young people who have just entered the housing market. Their debt is high, they will be very sensitive to interest rates.”

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Excess savings accumulated during the pandemic would provide a buffer for Canadians’ debt, she added. The Royal Bank of Canada estimates this buffer to be around $300 billion.

Rogers stressed that the Bank of Canada, which is often criticized for causing house prices, needs to adjust interest rates for the broader economy, not a specific segment, including the real estate market.

“Right now, interest rates will hurt borrowers, but inflation hurts everyone,” Rogers said. “So the best we can do — even for people with high levels of debt — is just bring inflation down.”

Taming the housing dragon is a problem Canada has grappled with for years, not just during the pandemic, which brought with it a period of extremely low interest rates and an unexpected surge in housing demand. Rogers called it an “unyielding problem.”

Rogers said, “If it was easy to solve, it wouldn’t be 15 years with us.”

• Email: [email protected] | Twitter: StephHughes95

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