Bank of Canada Model Shows Mixed Signals on Housing
Canada’s housing market is giving mixed signals on strains that could contribute to a crash, according to a model created by researchers at the country’s central bank.
Two of three housing market indicators are suggesting there have been imbalances from 2010 through June this year, according to a paper published today by four researchers at the Bank of Canada’s financial stability department.
“The variation among different indicators highlights the need to apply judgment in interpreting the signals,” the authors wrote in the central bank’s Review publication.
Governor Stephen Poloz has said there are signs of a “constructive evolution” of imbalances in household finances, and that the record ratio of consumer debt to disposable income is likely to stabilize. The bank said last month that the possibility of a “disorderly unwinding” of consumer finances is a key risk to the country’s economy.
The central bank researchers said their tracking showed imbalances in the ratio of home prices to income and in the deviation of an index of housing prices from its usual trend, according to the paper. There was no imbalance in the annual growth of house prices averaged over five years.
Another measure of the total amount of credit relative to the size of the economy also suggests an imbalance.
In a separate paper, Deputy Governor John Murray said that the bank’s policy interest rate doesn’t need to be at a “neutral” level when the economy is around full output and inflation is at the 2 percent target. There are often economic “headwinds and tailwinds” that can take inflation away from the bank’s target and policy makers need to “lean against” those forces, Murray said in the paper.
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