Bank of Canada’s Carolyn Rogers says supply is the key to solving housing problem

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The Bank of Canada’s Carolyn Rogers, who has spent much of her career as a regulator and policymaker trying to keep the country’s housing boom from becoming a bust, said the only thing that will moderate prices is more houses.

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“We have to fix the supply problem,” Rogers said this week in an interview, her first since replacing Carolyn Wilkins as governor Tiff Macklem’s No. 2 in December. “We keep trying these different things to dampen demand and Canadians still want houses. We have immigration coming in, (and) we have a strong economy.”

Rogers led British Columbia’s financial services regulator from 2010 to 2016, a period during which the average home price in Vancouver soared above $1 million, even as the provincial government taxed foreign buyers and municipal authorities added a tax on under-utilized properties. Rogers left B.C. to join the Office of the Superintendent of Financial Institutions (OSFI), where she helped the federal banking regulator develop the minimum qualifying rate, or “stress test,” one of Ottawa’s many vain attempts to cool housing demand.

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“We have a culture, where housing is sort of this rite of passage. It’s a sign of success,” Rogers said. “I lived in Europe for a couple of years and housing doesn’t have the same position in the economy or in this society. But in Canada, you get married, you buy a house, you have kids — that’s what you do. Everybody wants a house.”

We have a culture, where housing is sort of this rite of passage. It’s a sign of success … Everybody wants a house

Carolyn Rogers

Rogers acknowledged that ramping up the housing supply won’t be done overnight.

Canada Mortgage and Housing Corp. came to a similar conclusion in its first report in a series looking to assess how the country’s housing shortage is affecting affordability. Housing starts have been falling behind population growth in Canada’s largest cities, particularly in Toronto, since at least 2003, according to the report. CMHC noted the situation in Toronto, where the average home price is also now more than $1 million, had worsened in recent years.

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Canada’s elevated housing prices aren’t entirely a supply phenomenon. A decade of unusually low interest rates stoked the fundamental demand that Rogers pinpointed as the main driver. Now that interest rates are rising, some of the exuberance is being pulled out of the market. It’s a dynamic that is already playing out in Toronto, where home sales and prices slid in April, and nationwide as the average price of a home in March slipped two per cent to $796,000 from the month prior.

“Housing price growth is unsustainably strong in Canada,” Rogers told an audience after a speech in Toronto on May 3. “It would not be a bad thing for the economy, for the growth in housing prices to moderate a bit and we do expect that to happen as rates go up.”

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The Bank of Canada raised its benchmark interest rate a quarter point on March 2, a half point on April 13, and Macklem indicated during testimony at the House finance committee last month that he probably will lift the overnight target another half point when policymakers conclude their next round of deliberations on June 1. Lenders’ prime rates are informed by the Bank of Canada’s benchmark rate, pulling mortgage rates up with each hike. The Financial Post estimated that home owners could be seeing their variable rate mortgages pulled up to 2.35 per cent after these rate hikes, having Canadians pay $2,613 a month on a $500,000 mortgage.

The best thing we can do — even for people who have high levels of debt — is just get inflation down

Carolyn Rogers

In the interview, Rogers said she hopes the money that has been pouring into housing during the pandemic will start to move towards other segments of the economy, generating investment that will create more productive growth. Still, as borrowing costs rise, the pressure Canadians feel to keep up with mortgage payments could potentially put a drag on the goods and services sector as the economy recovers.

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Rogers said she and her counterparts at the central bank will be watching the added mortgage pressures Canadians are taking on, their ability to service debts, and the risks these pressures represent for the broader financial system. She added the central bank has strong visibility on these issues from its partnership with OSFI, noting that some segments of the population will be harder hit than others.

“We know there’s pockets of Canadians that are really stretched,” Rogers said. “Typically, it’s young people that have just gotten to the housing market. Their debt levels are high, they’re going to be really sensitive to interest rates.”

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Excess savings amassed during the pandemic will provide a buffer on Canadians’ debt levels, she added. The Royal Bank of Canada estimates that buffer stands at about $300 billion.

Rogers emphasized that the Bank of Canada, which is often criticized as the cause of runway housing prices, must adjust interest rates for the broader economy, not any one specific segment, including the housing market.

“Right now, interest rates will hurt borrowers, but inflation is hurting everyone,” Rogers said. “So, the best thing we can do — even for people who have high levels of debt — is just get inflation down.”

Taming the housing dragon is a problem Canada has been grappling with for years, not just during the pandemic, which brought a period of ultra-low interest rates and an unanticipated surge in housing demand. Rogers called it an “intransigent problem.”

Rogers said: “If it was easy to solve, it wouldn’t be with us 15 years.”

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