Finance Minister Jim Flaherty may have thought he had the last word after stating that he was tired of hearing Canadian banks call for a tightening of mortgage rules, and that he really thought banks should take on the responsibility of changing their own mortgage rules. Since then, people have kept pretty mum about the subject – in this country at least. Now Flaherty, as well as Bank of Canada governor, Mark Carney, are hearing it again. And this time, it’s coming from a bank in Japan.
The Nomura bank is changing it’s cry for a call to action from those of Canadian experts and analysts that were calling for Flaherty to make changes. Canadian bankers wanted Flaherty to make changes to amortization lengths, and to once again consider tightening HELOCs, home equity loans, and first mortgages. The Nomura bank however, understands that these changes have already been imposed, and they think it’s time to use Ottawa’s next best defense – the interest rate. As says Charles St-Arnaud, Nomura’s contributing economist, “We believe that the best way to engineer a soft landing in the housing sector would be for the Bank of Canada to increase its policy rates slightly.”
The Nomura report pointed to the fact that low interest rates have kept buyers flooding the market, and this has led to drastically increased home prices. St-Arnaud believes that in order to correct things, a 10%-15% drop in prices is needed, and that it’s not going to happen unless Ottawa increases the lending rate. However, St-Arnaud also realizes the harmful effect it could have if the Bank were to raise its interest rates too high too quickly, something that Mark Carney has been scared to do – and probably the reason why he’s left interest rates where they are for as long as he has.
And St-Arnaud agrees that a large rate hike could spell disaster for the Canadian economy. He continues on to say that even a full percentage point would be too much, “A small increase, around 50 basis points, in the policy rate would be enough to change household behaviour and slow the accumulation of debt, without jeopardizing growth. Since actions speak louder than words, a small rate hike could be the catalyst for households to change their behaviour and slow the accumulation of debt and the housing sector.”
With the “actions speaking louder than words” bit, it’s clear that St-Arnaud is referring to both Mark Carney’s and Jim Flaherty’s continued warnings about our rising household debt. But do you really think that our policymakers should be listening to a bank that’s across the world? Or do you think we’re doing just fine as we are, and that our housing market will correct itself when Mark Carney, and no one else, decides to raise the interest rate?
