He's damned if he raises interest rates and damned if he doesn't. Our central banker is the reluctant main character in Canada's housing drama.
In Canada, you can’t escape winter, taxes or, these days, red-hot housing-market inflation, whether you’re in a big city or a small town. The benchmark price for a single-family house in Greater Vancouver is now $2 million. Some bungalows in rural P.E.I. have doubled in price since the start of the pandemic. Renting in Toronto has become so competitive that tenants require a spotless resumé. Homelessness has skyrocketed everywhere.
At the centre of the housing fracas is Bank of Canada governor Tiff Macklem, who in mid-2022 began steadily raising the central bank’s interest rates in a bid to slow the economy and ratchet down inflation. Rates now stand at five per cent, double where they were when he began raising them. Higher interest rates have driven the average mortgage payment 30 per cent higher in the past year, squeezing the budgets of homeowners renewing mortgages and shattering the hopes of those looking to enter the housing market. Besides burying homeowners under unprecedented levels of mortgage debt, the hikes have also exacerbated rental-housing shortages by making it more expensive for builders to borrow money to break ground on new developments.
The good news, of course, is that the rate hikes have helped to cool inflation from 8.1 per cent in 2022 down to 2.9 per cent this February. And Canadians should remember that it was due to Macklem that rates were so low in the first place. A 62-year-old Montrealer, he held his first job at the Bank of Canada, as a financial analyst, in 1984. He climbed the ranks, eventually serving as the bank’s No. 2 between 2010 and 2014. During that time, he and former bank governor Mark Carney shielded the country from economic meltdown in the wake of the 2008 recession by holding interest rates down. Macklem repeated the move when he became governor in 2020, dropping borrowing rates to almost zero to spur spending and avoid collapse due to the pandemic. Both times, he helped save Canada from immediate financial disaster.
It’s not lost on Macklem that, today, the road to his target two per cent inflation rate is becoming a harder one for homeowners to travel. He talks about it like a collective national pilgrimage to the top of Everest. “The target is in sight,” he’s said, and “we have to stay the course.” The problem is that for many Canadians, the air up there is getting thin. Household debt in Canada—the highest of all G7 countries—
is now greater than its entire GDP, and 75 per cent of that debt comes from loans.
Things will likely get much worse; more than $1 trillion in mortgages will be renewed at higher interest rates between now and 2026, raising payments by 35 to 50 per cent. Mortgage defaults are still low, but banks are readying for rising delinquencies in the months to come. Potential buyers, meanwhile, are simply staying out of the market. Home sales in Toronto have sunk into recessionary territory, despite the fact that a much-feared recession hasn’t materialized. Would-be homebuyers have crowded the rental market instead, squeezing vacancy rates and spiking rental prices from coast to coast. Others are buying property elsewhere: Canadians funnelled US$6.6 billion into homes in the U.S. between April of 2022 and March of 2023; only Chinese buyers have spent more on American real estate.
Macklem’s relative anonymity is long gone. Premiers in Ontario, British Columbia and Newfoundland and Labrador wrote to him last September to urge him to stop raising interest rates. When he did hold them steady, Finance Minister Chrystia Freeland publicly applauded him. But Macklem has said he is not allowing public sentiment to sway his plans, and that the Bank of Canada is not ultimately responsible for the housing crunch. “Housing affordability is a significant problem in Canada, but not one that can be fixed by raising or lowering interest rates,” he said recently in a speech. In his view, monetary policy can’t clean up the mess caused by housing shortages, zoning restrictions, delays in development approval processes and a lack of skilled construction workers.
Regardless, Macklem’s next move will be crucial. Lowering rates too fast could flood the housing market with new buyers, contributing to renewed housing inflation and maybe even the kind of outlandish bidding wars and runaway home prices we saw just a couple of years ago. But keeping rates high will drive more would-be buyers toward already oversaturated rental markets and raise the risk of defaults, home foreclosures and more personal miseries. As far as Macklem is concerned, he is not the main character in Canada’s housing story. But anything he does will have a major, material and immediate effect on thousands or millions of Canadians. For now, all we can do is wait and watch.
This story appears in the May issue of Maclean’s. You can buy the issue here or subscribe to the magazine here.
