Housing fix needs patience, says Bank of Canada, as quick mortgage solutions carry long-term risks
The Bank of Canada's Senior Deputy Governor Carolyn Rogers urged caution in adjusting mortgage rules to tackle housing affordability.
According to BNN Bloomberg, she warned that excessive changes could have unintended consequences for households and the broader economy.
Speaking in Toronto, Rogers warned against “tinkering too much with the mortgage market,” noting that high home prices in Canada result largely from a supply and demand imbalance that will “take time” to address.
Rogers expressed optimism over government efforts across various levels to tackle the housing challenge and implement innovative solutions.
However, she emphasized the need for a careful approach, cautioning policymakers and regulators that focusing too much on measures aimed at reducing short-term financing costs could have long-term impacts on households' financial stability, the mortgage market, and the economy.
“Leaning too much on measures that reduce the short-term cost of financing could have long-term impact,” she remarked.
Prime Minister Justin Trudeau’s administration has announced several changes to mortgage rules recently, such as extending amortization periods to 30 years from 25 for specific borrowers and allowing insured mortgages on homes valued up to $1.5m.
Rogers illustrated the implications of extended amortizations by noting that adding five years to a mortgage term might lower monthly payments by $200 yet increase total interest costs by $50,000 over the mortgage’s duration.
While extended amortizations and lower debt payments may enhance returns for lenders, Rogers highlighted that these adjustments could introduce greater risks for both borrowers and lenders.
She pointed out that financially stressed borrowers might use amortization extensions as a buffer, but if they reach the maximum duration, that safety net vanishes. Moreover, lenders may face higher capital demands, potentially resulting in elevated interest rates for households.
Rogers addressed the perception that Canadian households are struggling to manage rising borrowing costs as they renew their mortgages at higher rates post-pandemic.
“Our mortgage market has fared well through a period of economic turbulence and a sharp rise in interest rates. Arrears rates have risen but remain near historically low levels,” she stated.
In her speech, Rogers commended the return of inflation to the Bank’s 2 percent target, attributing this outcome to the effectiveness of the Bank’s monetary policy. She acknowledged that the recent rate hikes were challenging but ultimately necessary to stabilize prices.
“It did get inflation under control without creating the sharp economic downturn that many feared,” she said. “Interest rates have started to come down, and we have the prospect of further normalization ahead.”
Last month, the central bank reduced borrowing costs by half a percentage point, setting the benchmark overnight rate at 3.75 percent.
Rogers also addressed Canada’s limited availability of longer-term mortgage options, suggesting that “policy changes may be necessary” to diversify the market beyond the standard five-year term.
