Toronto Home-Price Gains Aren’t Sustainable, Poloz WarnsBy
Bank of Canada governor reminds buyers prices can also fall
Rate of appreciation is ‘divorced’ from fundamentals
The speculation increasingly driving Toronto home prices is unsustainable, the head of Canada’s central bank said, warning buyers they should be prepared to weather a potential correction.
At a press conference Wednesday in Ottawa, Bank of Canada Governor Stephen Poloz cited recent reports showing prices in the country’s biggest city are rising faster than 30 percent, a pace that’s “divorced” from typical metrics of demand such as income growth and demographics.
“There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it’s that gap between what fundamentals could manage to explain and what’s actually happening which suggests that there is a growing role for speculation,” Poloz said.
In a quarterly policy report also released Wednesday, the central bank boosted its 2017 GDP growth forecast to 2.6 percent, from 2.1 percent, attributing that increase mostly to the strength in residential investment. Housing will contribute 0.3 percentage point to 2017 GDP growth, the bank said, reversing its January prediction the sector would detract 0.1 percentage point from growth.
Poloz gave buyers a direct warning they must be able to withstand the risks of getting into a hot market. “It’s time we remind folks that prices of houses can go down as well as up,” he said. “People need to ask themselves very carefully, ‘Why am I buying this house?”’
He was more explicit than in previous statements about the extent to which price gains probably can’t be sustained. Any price that’s rising at a rate of 30 percent or more “has divorced itself from any fundamentals that we can identify,” the governor said. “It puts it into what I would call an unsustainable zone.”
Single-family homes in the core of the nation’s biggest city have seen unprecedented appreciation, climbing to almost C$1.6 million ($1.2 million) even after the federal government moved to tighten lending rules. Canadian Finance Minister Bill Morneau asked last week for a meeting with his provincial and local counterparts to take a “closer look” at Toronto’s housing market.
Poloz held his key interest rate at 0.5 percent Wednesday and said a rate cut is no longer on the table amid signs of an improving economy. He added the central bank would never take steps to address housing if that came at the expense of its primary objective of achieving 2 percent inflation. Low rates are less of a factor than speculation in fueling runaway prices, he said. “Interest rates aren’t what is fueling that speculation, it does add to demand at the bottom of course,” he said.
A strong price correction in a market the size of Toronto could spread to other cities, however there’s no way to predict that, Poloz said.
“For folks who are in the housing market it’s a question of risk management, what would you do if there was a correction?” the governor said. “When something has been rising that quickly, of course it’s vulnerable to a correction.”
— With assistance by Erik Hertzberg