Senior Deputy Governor Carolyn Rogers talks about housing affordability and why it is so difficult to fix, explaining that housing has become about more than just a place to live. It is now closely tied to household wealth, financial stability and economic growth.
Watch Senior Deputy Governor Rogers speak to the Greater Victoria Chamber of Commerce and CFA Society Victoria. Read the full speech. Read the full speech.
The housing affordability dilemma
Housing affordability is a top concern for Canadians, especially those trying to buy or rent a home.
Higher prices mean a lot of household income goes to shelter, stretching budgets and leaving less for other things. Home prices have fallen in some markets, making housing more affordable for some buyers. But lower prices can also erode consumer confidence and household wealth, and slow economic growth.
This creates a difficult dilemma. Housing is not only about shelter. It has also become closely tied to household wealth and credit, the stability of Canada’s financial system and overall economic activity.
That is why there is no easy solution to the affordability challenge.
How we got here
Over the years, many regulations and policies have tried to address issues in the housing market.
These measures helped make the financial system more resilient to the risks that come with high home prices and household debt. But none of them have done much to restore affordability.
A key example is the mortgage stress test introduced in 2017. It helped ensure borrowers could manage their payments at higher interest rates. That gave homeowners and the financial system some protection. But it did little to improve affordability, because home prices continued to rise.
Many factors have contributed to this situation.
The Bank of Canada’s monetary policy played a role. Low interest rates supported the economy through the pandemic, making mortgages cheaper. This also increased housing demand, pushing up prices.
But monetary policy is only part of the story.
Housing supply has not kept up with demand because of population growth and constraints such as zoning and infrastructure limits. As well, over time, housing has come to be seen as an attractive investment, not simply a place to live.
Controlling inflation is our best contribution
As part of the review of our monetary policy framework, we have looked at how interest rates affect housing and how inflation in shelter costs is measured.
Our research finds little benefit in changing how we assess shelter inflation. Also, because the policy interest rate is a blunt tool used to control inflation across the whole economy, it should not be used to address rising home prices. Monetary policy cannot target one sector, increase the pace of housing construction or simplify the process for issuing building permits.
The Bank can best contribute to affordability by keeping inflation low and stable.
Real progress on affordability will take time. It will require a mix of more housing supply, better planning and infrastructure, and steps to make Canada’s economy less dependent on rising house prices.
Housing must remain an important input into monetary policy decisions, but targeting house prices directly with interest rates would ask monetary policy to do more than it can reasonably do.”