EDMONTON - The Bank of Canada appears to be cooling its rhetoric on the country's housing boom, all but ruling out raising interest rates to dissuade prospective home buyers from taking on too much mortgage debt.
Bank official David Wolf said in a speech Monday that in the central bank's view it is premature to be talking about a housing bubble in Canada.
And he said even if the bank judged that housing prices were getting out of hand, raising interest rates is too blunt an instrument since it would have the effect of cooling off the entire economy.
"We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession," he said in an Edmonton speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons. Notes from the speech were posted on the bank's website.
"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.
"This is why we say monetary policy is a blunt instrument for achieving financial stability."
Wolf, a former chief economist with Merrill Lynch Canada who is currently adviser to governor Mark Carney, said there were other ways to dampen Canadians' enthusiasm for homes without resorting to raising interest rates.
Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a house can be amortized from the current 35 years.
The bank has been highlighting for months the danger of Canadians getting in over their heads in purchasing homes, warning that buyers should ensure they don't take on too much debt.
The bank's worry is that homeowners with large mortgages that are manageable now with interest rates at record lows won't be able to afford their monthly payments once interest rates start rising, as is expected later this year.
Wolf, however, said the bank's worry is about what could happen rather than the current situation.
"We see the housing market requiring vigilance, not alarm," he said.
Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.
Moreover, he noted with starts below long-term demographic requirements, that the number of houses on the market are still declining.
"In the Bank of Canada's view, it is premature to talk about a bubble in Canadian housing markets," he said. "Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals."
He added, however, that the bank will continue to monitor the situation closely.