The governor of the Bank of Canada argues that the central bank cannot solve the housing crisis with interest rates, because it is primarily a problem of insufficient supply.
Tiff Macklem appeared before MPs on the Commons Finance Committee on Thursday, a week after the central bank’s decision to keep its key rate at 5%. The governor faced numerous questions Thursday about housing affordability.
Mr. Macklem acknowledged that high interest rates were fueling rising housing costs. But he noted that housing price inflation has historically been high in both low and high interest rates.
“We are not going to solve the housing problem with low interest rates or with high interest rates. We tried both. And we’ve had a lot of housing price inflation,” Mr Macklem said.
High interest rates have increased the cost of taking out or renewing mortgages and made it more expensive for real estate developers to obtain financing to build.
Conversely, low interest rates also drive up housing costs by further stimulating demand. Home prices rise as people rush to buy in an ecosystem where rates are lower.
Mr Macklem believes the government should focus on increasing the supply of housing to improve affordability, and warns that conversely, public policies that increase demand will only make this situation worse.
Last week, by announcing the maintenance of the key rate at 5%, the Bank of Canada also indicated that it was starting to think about a timetable for possible rate reductions.
Most economists expect the central bank to start cutting interest rates around the middle of the year. But the pace of inflation reduction in the coming months could impact this timetable.
Very low vacancy rate
The central bank indicated last week that housing costs remained “the biggest contributing factor” to the fact that inflation is still above the 2% target set by the Bank of Canada.
Canada’s overall annual inflation was 3.4% in December. On the other hand, housing costs increased by 6% compared to the previous year.
Rent prices in Canada skyrocketed last year as supply struggled to keep up with demand, leading to the lowest national vacancy rate on record since Canada Mortgage Corporation and Housing (CMHC) collected this data in 1988.
The federal agency said in a report Wednesday that the vacancy rate for rental apartments in Canada was 1.5 per cent during the first two weeks of October 2023, when CMHC conducted its annual survey.
This vacancy rate is down from that of 1.9% recorded a year earlier, which at the time already represented the lowest national rate in more than twenty years.
Vacancy rates have decreased significantly in Montreal, Toronto, Calgary and Edmonton, the CMHC noted on Wednesday. In Montreal, this rate went from 2% in October 2022 to 1.5% last October. In Quebec, it went from 1.5% to 0.9%; in Trois-Rivières, from 0.9% to 0.4%; in Montmagny from 0.6% to 0.2%.