Pressure builds on Bank of Canada to tackle house prices

By Fergal Smith

TORONTO (Reuters) – Pressure is building on the Bank of Canada to signal an interest rate hike, as some economists fret about a rapid rise in domestic house prices after eight years of rock bottom borrowing costs.

The central bank has kept its policy rate at or below one percent since 2009 in an effort to stimulate an economy that had struggled to gain traction since the global financial crisis. But house prices have more than doubled over the period in the two biggest markets, Toronto and Vancouver, and a closely watched measure of a country’s vulnerability to debt, the household debt-to-income ratio, has risen to a record high 167 percent.

Economists worry that leaving low rates in place for too long could encourage too much borrowing and leave the economy vulnerable if growth slows or house prices drop, while investors have seized on recent hints of risks to financial stability.

“The way you reduce the pace of credit growth and eventually solve the problem of high leverage is by having higher rates, not by keeping rates low,” said Carlos Capistran, ‎head of Canada and Mexico economics at Bank of America Merrill Lynch.

“It is painful for the economy when you start tightening but you have to do it at some point. Otherwise, leverage is going to keep increasing.”

Bank of Canada Governor Stephen Poloz said this month that 30 percent gains in Toronto house prices are not sustainable and have been driven in part by speculation. But the central bank has favored macro-prudential tools, such as steps taken by federal and provincial governments that crack down on speculation and tighten mortgage lending rules, to promote financial system safety.

The central bank declined to comment, saying it is in blackout ahead of its interest rate decision next week.

To be sure, the latest data showed Canadian home resales fell in April, in a sign the government moves are helping to rein in runaway property prices. But it is unclear how long the adjustment will persist.

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