Bank of Canada governor wants to avoid housing policy mistakes of the past

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The Bank of Canada takes a lot of heat over this country’s various housing bubbles.

Former governor Mark Carney definitely lit the match back in 2009 by dropping the benchmark interest rate to almost zero and leaving it there for a year. It was intentional. Starting a fire in the housing market was a big part of the plan to beat the Great Recession, just as it’s a key element of the central bank’s current strategy to reverse the economic effects of the COVID-19 crisis.

“We do have very low interest rates, and we have given extraordinary forward guidance,” Tiff Macklem, the current Bank of Canada governor, said in an exclusive year-end interview on Dec. 16. “That’s partly how monetary policy works. It stimulates, lowers the cost of credit, so you’re probably going to see more spending on things that people use credit for. Housing would be high on that list.”

Some have blamed Carney and Stephen Poloz, who replaced him in 2013, for real-estate bubbles, but I’ve never thought so. Their missions were to get annual inflation back to the Bank of Canada’s target of about two per cent, which they did fairly successfully.

Everyone knew ultra-low interest rates risked distorting some prices and igniting a dangerous surge in mortgage lending. The central bank could have snuffed that out by raising its benchmark rate, but not without hurting the rest of the economy and adding to deflationary pressures.

Politicians were the only ones who had the power to restrict mortgage lending, and they were loath to give it up to the central bank. The late Jim Flaherty, who served as finance minister under former prime minister Stephen Harper, in 2009 decided that oversight of the financial system would rest with him.

Bill Morneau, who was Prime Minister Justin Trudeau’s first finance minister, made the same decision, declaring he would decide when to deploy “macroprudential policy,” a fancy name for targeted measures intended to deflate asset-price bubbles, such as the minimum down payment needed to qualify for a mortgage insured by the federal government.

“At the end of the day, I am ultimately responsible for supporting financial security, and the stability of our financial system,” Morneau, who retired earlier this year, told an audience in Toronto in 2016.

Flaherty and Morneau both struggled to stay ahead of the housing problem, partly because politics kept getting in the way. The real-estate lobby is powerful, as are homeowners themselves when viewed as a voting bloc.

I once heard Morneau tell an audience in Montreal that voters were counting on him, as finance minister, to “ensure their home keeps its value.” Politicians will always need an extra incentive to approve something that might make it harder for us to buy property. During the first experiment with low-for-long interest rates, that usually meant overwhelming evidence that the country was on the verge of a housing meltdown. The result is a herky-jerky approach to regulation that creates unnecessary volatility.

“I agree that at times it might have been even better to move a little earlier and a little more gradually, particularly when you are using new instruments,” said Macklem, who served as Carney’s understudy before leaving the central bank in 2014 to lead the University of Toronto’s business school. “If you wait until the problem is more serious, of course, you have to move faster … When you look back with 20-20 hindsight, you think, ‘Oh, we should have dealt with that a little earlier.’ It’s easy to be a Monday morning quarterback.”

If only he were the everyday quarterback.

The Bank of England after the 2008-09 financial crisis took housing regulation in-house, which required elected representatives to surrender some power to a technocratic authority. The International Monetary Fund and various experts have long prodded Canada to do something similar, but the desire has never been there, probably because we didn’t face a financial meltdown like they did in London 12 years ago. Our relative stability has allowed elected and unelected powers in Ottawa to convince themselves that their approach to macroprudential policy works just fine.

At the national level, that involves private meetings of the deputy minister of finance, the governor of the Bank of Canada, the superintendent of financial institutions; the president of Canada Deposit Insurance Corp., the commissioner of the Financial Consumer Agency of Canada and, when appropriate, the head of Canada Mortgage and Housing Corp. (CMHC).

This group is known as the Senior Advisory Committee. They get on well, I’m told, but the SAC has no formal power: all it can do is make suggestions to the finance minister, who, since 2006, has had to balance doing the right thing for the financial system with getting elected in the Greater Toronto Area.

No central banker is going to publicly say the regulatory system needs changing. There’s nothing to be gained by seeding doubts about the current regime, and it would be highly inappropriate, given that any change must be a political decision.

Nevertheless, it’s something Finance Minister Chrystia Freeland should consider once the pandemic is under control. The housing market has surprised many by reigniting from within the depths of one of the worst recessions ever. And the fire is spreading. CMHC this week identified places such as Ottawa and Moncton, N.B., as new pockets of overheating.

“We are keeping an eye on it,” Macklem said, adding that much of the demand is coming from renewed interest in single-family homes, as big-city condo markets have turned weak. “In general, we believe markets work. So, you want to be cautious when you are nudging the market. You want to be pretty confident it needs a nudge.”


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Original Article Source Credits:   Financial Post ,

Article Written By:  Kevin Carmichael

Original Article Posted on:  Dec 18, 2020

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