March 21, 2016/iMFdirect
Canada’s housing market is sizzling hot and the Bank of Canada has a monetary policy dilemma: increase interest rates to cool the housing market would hurt borrowers and the economy; keep interest rates low adds fuel to the borrowing that led to the rise in housing prices and in household debt. What to do?
Housing headache
The latest national data on house prices in February suggest a year-on-year increase of 9 percent. House prices in Vancouver and Toronto—that contribute about a third of Canada’s GDP—have led the increase.
Canada’s housing boom has been accompanied by a steady rise in the nation’s household debt to 165 percent of disposable income by the end of 2015 (see chart). One way to cool the housing sector is to increase interest rates, but that would hurt the slowing economy, which has been hit hard by the decline in oil prices. Hence, the dilemma.
