The Bank of Canada governor is calling on governments at all levels to work together to increase housing supply across the country, arguing that monetary policy cannot address rising home prices, the biggest driver of overall inflation. alone.
Appearing before the House Finance Committee on Thursday, Tiff Macklem fielded questions about housing affordability and the central bank’s own role in increasing housing costs for many homeowners by raising mortgage rates.
“Low interest rates won’t solve the housing problem, and neither will high interest rates. We’ve tried both, and shelter prices have increased significantly,” he said.
“The lasting solution is to increase supply, and that includes both the supply of housing and the supply of purpose-built rentals.”
Shelter costs continue to rise even though overall consumer price index inflation has declined (from a peak of 8.1% in 2022 to 3.4% in December).
This is partly the result of the Bank of Canada’s own monetary tightening campaign, as rising interest rates increase monthly mortgage payments. Mortgage interest costs rose 28.6% in December compared to the previous year.
However, due to a long-standing shortage of rental properties due to active population growth due to immigration, rents have been rising rapidly, rising 7.7% in December compared to the same month last year. And while house prices have fallen from their 2022 highs, they haven’t fallen as much as the central bank had expected.
“When interest rates go up, home prices typically go down,” Senior Vice Chancellor Carolyn Rogers told a parliamentary committee Thursday. “But we haven’t seen that offset because we have a chronic and structural housing shortage in Canada.”
Both Mr. Macklem and Mr. Rogers dismissed questions about when the Bank of Canada would lower interest rates. The bank kept its policy interest rate unchanged at 5% for the fourth consecutive time last week. Although the threat of further interest rate hikes has subsided, he acknowledged that it is too early to start talking about monetary easing.
Bay Street analysts and financial markets expect the central bank to begin cutting rates in the first half of 2024, with most saying it will most likely happen on the day the rate cut is announced in June. Former Bank of Canada Deputy Governor Paul Bewdley, who retired last summer, said earlier this week that he thought a rate cut in July was likely.
“You can’t put it on the calendar,” Macklem said Thursday. “We need to see how inflation develops.”
The central bank’s latest forecast is for annual CPI inflation to remain around 3% until mid-2024, fall to 2.5% by the end of the year, and return to the central bank’s target of 2% by the end of next year. .
A key part of bringing inflation back under control includes addressing rising shelter costs. But central banks face several dilemmas here.
Lower interest rates will come as a relief to homeowners who are waiting to renew their adjustable-rate or fixed-rate mortgages. But any sign of interest rate cuts could cause house prices to soar even further. It happened last spring, when the Bank of Canada first announced a “conditional suspension” of monetary policy tightening, which ultimately led to the Bank of Canada’s decision to raise interest rates two more times last summer.
High interest rates also inhibit the construction of new homes by increasing costs for developers and reducing demand for pre-construction sales. This is reflected in the decline in housing starts. Indeed, banks’ efforts to reduce demand in the short term may have a negative impact on long-term supply.
Mr. Macklem downplayed this dynamic, arguing that there were trade-offs that were worthwhile, at least from the perspective of reducing inflation.
“Certainly there will be an impact on the supply side,” he told lawmakers about the interest rate rise. “Developers are pointing that out. But if you look at the sector as a whole, the impact on demand is much stronger than on the supply side.”
In the medium term, Macklem said all levels of government – federal, state and local – need to do more to encourage housing construction while avoiding policies that increase demand for housing.
“Anything that improves supply is particularly helpful in the current situation: it speeds up permitting, takes some of the uncertainty out of the process and makes it more predictable.”
The federal and state governments have announced several policy changes in recent months aimed at encouraging construction. These include tax breaks on new purpose-built rental units and increased funding available to builders through the expansion of Canada’s mortgage securitization system.
The federal government also took steps to reduce demand for rental housing by capping the number of international students allowed to study in Canada. Ottawa announced last week that it would approve about 360,000 undergraduate study permits in 2024, a 35 per cent decrease from last year.
Macklem said in an interview with The Canadian Press last week that the cap “will help relieve some of the rent pressure going forward.”