‘Carolyn Rogers, Senior Deputy Governor of the Bank of Canada Address to the Economic Club of Canada’
On November 6, 2024, The Economic Club of Canada hosted Bank of Canada Senior Deputy Governor Carolyn Rogers who discussed features of Canada’s mortgage market, how they compare with other economies, and what they mean for consumers, financial institutions and the public sector at this point in time.
SPEAKERS
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KEY TAKEAWAYS
Carolyn Rogers, Senior Deputy Governor of the Bank of Canada opened by acknowledging the event’s timing, the morning after the U.S. election. She then focused on housing finance, a recurrent and significant issue in Canada, reflecting on changes since a previous discussion in 2019, when she addressed mortgages as a bank regulator.
Macroeconomic backdrop and recovery
Pandemic impact: Canada experienced a drastic economic downturn, followed by a fast recovery, and later a spike in inflation.
Inflation control: The Bank’s efforts have brought inflation back to a 2 per cent target, but at a cost, with many Canadians feeling the economic burden through higher costs for essentials.
Interest rates: Interest rates are stabilizing after rapid hikes, and normalization is on the horizon, but many Canadians still feel economic strain, particularly in housing affordability.
Housing affordability and the mortgage ‘renewal wall’
Renewal challenge: The "mortgage renewal wall" involves over 60 per cent of Canadian mortgages, around 4 million, due for renewal within the next two years. Most of these mortgages haven’t renewed since rates began to rise in 2022, resulting in significantly higher payments.
Bank of Canada’s response: The Bank has conducted extensive research into this issue, evaluating potential impacts on consumer spending, financial stress for borrowers, lender losses, and broader financial stability.
Possible fiscal implications: Large-scale mortgage losses could affect market liquidity and financial stability, potentially impacting federal finances due to government-backed mortgage insurance.
Canadian mortgage market: History and evolution
Policy trade-offs and financial stability
Affordability and financial risks: Policy changes aimed at making housing more affordable can increase long-term borrower costs. For example, extending amortizations from 25 to 30 years reduces monthly payments but raises total interest costs by tens of thousands of dollars.
Risks of expanded credit: More accessible credit and smaller down payments benefit lenders through higher returns but increase risks for both lenders and borrowers by reducing financial buffers for borrowers facing stress.
International comparisons in mortgage policy
U.S. mortgage structure: U.S. borrowers often have 30-year fixed-rate mortgages, which shift interest rate risks from borrowers to lenders, but come with high interest rates.
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European and other models: Countries like Norway and Australia favour variable-rate mortgages, leaving interest rate risks with borrowers. Some European countries, such as Denmark and Norway, allow 50- to 100-year, often intergenerational, mortgage terms.
Risk in the U.S. market: Rogers noted how U.S. lenders, by not holding mortgages on their balance sheets, contributed to poor underwriting practices leading up to the 2009 financial crisis. This “securitization culture” led to loans with minimal borrower verification.
Impact of immigration on the housing market
Population growth: Recent population growth has driven up demand, placing pressure on housing prices. Immigration has both stimulated economic activity and exacerbated housing supply challenges.
Labour market balance: Immigrants fill critical job roles, easing labour shortages, but also add demand to a tight housing market. The Bank views these shifts as having a two-sided effect on growth and inflation.
Productivity and investment
Comparative challenges with the U.S.: Canadian productivity has lagged, largely due to lower business investment relative to U.S. firms, which invest more in technology, telecommunications, and R&D.
Cautious investment culture: Canadian companies often wait for proven results before investing in emerging technology, contrasting with the more aggressive U.S. approach.
Research and innovation potential: Despite strong university programs and recent advancements, such as the Nobel Prize in AI research, Canada struggles to commercialize innovations and boost productivity.
Generational wealth transfer and housing affordability
Wealth disparities: Canada faces a projected $1 trillion intergenerational wealth transfer by 2025, which could deepen housing market disparities. The Bank noted that families with inherited wealth have advantages in homeownership, exacerbating the gap between those who can and cannot afford homes.
Inflation considerations and target review
The 2 per cent inflation target: The Bank’s 2 per cent target is viewed as a rate that allows households and businesses to make decisions without worrying about inflation. This target will be reviewed in 2026, with public input on potential adjustments.
Flexibility within the target: The Bank operates with a range around the 2 per cent target to absorb economic shocks while maintaining price stability.
Long-term housing affordability solutions
Supply vs. mortgage tweaks: Addressing housing affordability requires focusing on supply-demand balance rather than relying on mortgage market adjustments, which may only provide short-term relief.
Caution against over-intervention: Rogers cautioned against excessive changes to the mortgage market, as these could destabilize financial health for households and lenders, impacting the economy.
Strengths and future prospects of Canada’s economy
National strengths: Canada has a robust framework for integrating immigrants, strong research institutions, rule of law, and a stable democratic government—factors that position it well economically.
Challenges in commercialization: Rogers emphasized the need for Canada to improve commercialization efforts, leveraging its research and technological expertise to enhance productivity and growth.
Stability and resilience
Value of stability: Rogers urged a focus on financial stability and policy certainty, stressing the importance of incremental, well-considered decisions to maintain long-term resilience.
Future outlook: Ending on a cautious note, Rogers highlighted that stability in housing and economic policy is crucial for long-term success, especially during periods of change.