The Bank of Canada won't raise interest rates to cool the country's hot housing market, a spokesman said Monday, preferring to leave any tinkering to the country's Finance Minister.

“Some observers – those who see a housing bubble forming – have said that since low interest rates have stimulated housing market activity, the Bank should now raise interest rates to dampen that activity,” deputy governor Timothy Lane wrote in a speech delivered by an adviser on his behalf in Edmonton. “But that poses a problem.”

Existing-home sales are up 73 per cent year-over-year, while prices have climbed nearly 20 per cent as buyers take advantage of historically low interest rates to finance purchases.

Those who fear a bubble worry that many people are taking advantage of cheap money to buy homes they wouldn't be able to afford once rates rise, leading ultimately to a crash in prices.

Mr. Lane said the bank understands the concern, but it uses its lending rate to keep inflation in check for the whole economy and the housing market is “only one of several factors” that influence inflation.

Other sectors could be adversely affected if the rate jumped before the broader economy was ready, he said.

“If the Bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”

Instead, he said, the government could increase capital requirements for lending institutions, adjust loan-to-value ratios and change the terms and conditions required to obtain mandatory mortgage insurance.

“These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions,” he said. “Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

In an end-of-year interview with CTV, Finance Minister Jim Flaherty said the government would consider raising the minimum down payment from 5 per cent “to a higher figure” and reducing the amortization period of 35 years to "something less."

But the Minister stressed that the government has not yet made that decision.

"If there is, in the future, evidence of a residential real estate bubble, the tools we have are the tools we've used before, relating to insured mortgages, lending standards, amortization periods and down payments, which is what we acted on in the summer of 2008," Mr. Flaherty said in a late-December interview with The Globe and Mail.

In the summer, the government said it would no longer insure zero-down-payment mortgages or mortgages with an amortization period of more than 35 years.

http://www.theglobeandmail.com/report-on-business/bank-of-canada-wont-raise-interest-rates-to-cool-housing/article1427298/

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Ram Saravanan
REALTOR®
Homelife Landmark Realty Inc. Brokerage
Tel: 647-200-2266

So does this guarantee no rise in interest rate or is it a guess / suggestion ? And until when ?

Quote:

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Originally posted by Aashu

So does this guarantee no rise in interest rate or is it a guess / suggestion ? And until when ?

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Ram Saravanan
REALTOR®
Homelife Landmark Realty Inc. Brokerage
Tel: 647-200-2266

Ram, I dont know how much truth is in this article. but indeed its a good post.

if this is truth then one can take time to buy house instead of rushing - good post

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'Some goals are so worthy, it's glorious even to fail.' (Param Vir Chakra awardee Lt. Manoj Pandey)

One of the main reasons BoC is not raising interest rates is because it'll spiral the CAD above the USD, which will be disastrous for our economy (more than it already is).
They also know that the RE bubble in Canada is now in dangerous situation and there is rampant inflation in the economy, esp. in essential goods and services.
So they are caught between the devil and the deep blue sea.
They know that they should be raising interest rates, but are not doing so.
Instead, they are paying lip service to more controlled mortgage lending like higher down payments and higher debt/income ratios.
I think they'll wait until it is clear when and how much the US Fed will raise interest rates and then they'll make a move.
In the meantime, they're continuing to pull wool over the eyes of everyone by talking about deflation and denying that there is a RE bubble.
In my humble opinion, the Canadian economy can sustain higher interest rates, much higher than what they have now.
It will put an end to the RE bubble and bring inflation under control.
And if that means that the Canadian $ becomes stronger than US$, then so be it - the USD is fast becoming less worth than the paper it's made of.

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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."

-- Rhett Butler in "Gone with the Wind"

As BOC said RE is just one sector.. and is a imp sector as every time a house changes hands it gives work to lot of trades people..

Canada is still suffering from Job losses from the recession.. If int rates are raised then the economy will go back into recession..

Inflation is negligible here and that coupled with no new job creation will keep interest rates down for a while..