Consequences of “Leaving Interest Rates Very Low for a Long Time”: Bank of Canada Governor Poloz

A litany of problems, from too much debts to deflating housing bubbles in Vancouver and Toronto.

By Steve Saretsky, Vancouver, Canada, Vancity Condo Guide:

With the Bank of Canada’s overnight interest rate stalled out at 1.75%, lower than the rate of inflation, and leaving real rates stuck in negative territory, monetary policy continues to deliver stimulus to an incredibly long and aging economic expansion, one which has witnessed record debt accumulation. That is, at least, according to Bank of Canada Governor Stephen Poloz who delivered a speech in Montreal this past week.

Poloz ironically re-iterated the consequences of a prolonged negative interest rate environment:

“We have seen the natural results of leaving interest rates very low for a long time. For one thing, this has been hard for people, such as retirees, who rely on interest from their savings for their income.

“Further, people have taken on a lot of debt, mostly in the form of mortgages and home equity lines of credit. By 2017, the ratio of household debt to disposable income had hit a record – with the average household owing more than $1.70 for every dollar of disposable income.

“If we remove households that do not have mortgages, the ratio becomes much higher – close to $3 for every dollar of disposable income. And house prices were rising extremely quickly in some of Canada’s biggest cities.”

Indeed, the Canadian debt story has perhaps grown tiresome. Yet a recent report from Bloomberg Intelligence further reminds us the debt problem won’t be going away anytime soon despite continued warnings with little repercussions to date. Per the report, the share of uninsured mortgages and home equity lines of credit (HELOC) at most big Canadian banks has crept up to 65% of their mortgage portfolio. CIBC takes the cake, with uninsured loans reaching 66% of the mortgage portfolio and total mortgage lending accounting for 60% of all loans. Nearly half of its lending is dedicated to Ontario and British Columbia.

However, recent shifts in the housing market have awoken debt skeptics and policy makers alike. Most notably, Mr. Poloz, who admittedly was caught off guard in his most recent speech:

“Housing activity has been a little weaker than we expected recently. Mostly it is housing resales that have been soft, suggesting there may have been more froth in certain housing markets than previously thought.”

National home sales were down just 4% year-over-year in January, the slowest January since 2015. However, as Mr. Poloz noted, Canada’s once frothiest markets have elicited significant weakness. The Vancouver housing market witnessed sales sink to an 18-year low in 2018, while home sales in the Toronto area slipped to a 10-year low.

Rest assured, Poloz eased market jitters confirming:

“Housing markets that were not experiencing bidding wars appear to be adjusting in line with our expectations. However, more data will help us better understand the full situation in Canada’s housing market.”

Indeed, more data is just what the Governor ordered. Mortgage-delinquency rates, a lagging indicator, remain relatively benign in Canada, although a recent uptick in December along with an increase in personal bankruptcies over the prior two months suggests the bottom is in, and we are moving higher from here. By Steve Saretsky, Vancity Condo Guide

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