The Organization for Economic Co-operation and Development (OECD) says Canada needs to do more to rein in the overheated housing markets of Toronto and Vancouver, including raising interest rates.
In the past year, the governments of B.C., Ontario, as well as the federal government, have all made efforts to cool the housing market and increase affordability using everything from taxes to tighter mortgage rules and rent control. Despite these measures being somewhat successful, the OECD says Canada needs to do more.
In the economic organization’s latest global economic outlook report, the OECD says that it’s time for the Bank of Canada to raise interest rates, because the country’s economy has been firing on all cylinders for a long time now.
“Excess capacity is projected to be used up by early 2018, and accordingly the Bank of Canada is projected to start increasing rates towards the end of 2017,” the OECD said in its report. “Raising interest rates will reduce overheating in housing markets, which poses economic and financial stability risks.”
Canada’s low rates have certainly propped up the economy in the past decade, but low rates have also led people to accumulate record levels of debt. Low rates have also accelerated housing prices in Vancouver and Toronto, leading many residents in those cities to take on mortgages of a million dollars or more.
Still, despite the concerns, it’s clear the Canadian economy is running out of excess capacity after a string of positive data this year. Excess capacity refers to a situation where a country has more labour and manufacturing capability than it can use, leading to increased unemployment and a decline in GDP.
The fact that Canada is near capacity means that the Bank of Canada will have to change its cautionary stance on interest rates soon.
Raising rates, of course, is expected to have a significant cooling effect on Canada’s housing market. Though it doesn’t come without risk. Hiking rates too quickly could crash the market — as happened in the late 1980s, when a rapid doubling in Toronto housing prices was followed by the Bank of Canada raising interest rates into the double digits.