Macklem says monetary policy can’t solve housing inflation, urges governments to help boost home construction
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Bank of Canada Governor Tiff Macklem waits to appear at a Finance Committee meeting on Feb. 1, in Ottawa.Adrian Wyld/The Canadian Press

The Bank of Canada governor is urging all levels of government to work together to boost the supply of homes across the country, arguing that the rising cost of housing, which has become the biggest driver of overall inflation, can’t be addressed by monetary policy alone.

In a Thursday appearance before the House of Commons finance committee, Tiff Macklem was peppered with questions about housing affordability and the central bank’s own role in increasing shelter costs for many homeowners by pushing up mortgage rates.

“You’re not going to solve housing with low interest rates and you’re not going to solve it with high interest rates. We’ve tried both, and we’ve had high shelter price inflation,” he said.

“The durable solution is to increase the supply, and that includes both the supply of homes and the supply of purpose-built rental.”

Even as overall consumer price index inflation has declined – falling to 3.4 per cent in December from a 2022 peak of 8.1 per cent – shelter costs have continued to surge.

This is partly a result of the Bank of Canada’s own monetary policy tightening campaign, as higher interest rates push up monthly mortgage payments. Mortgage interest costs rose 28.6 per cent in December from the year before.

But rents have also been rising rapidly, jumping 7.7 per cent year-over-year in December, as brisk population growth driven by immigration has run into a long-standing shortage of rental units. And home prices, while dipping from 2022 highs, have not fallen as much as the central bank had expected.

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Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Wilkins make their way to the Finance Committee meeting.Adrian Wyld/The Canadian Press

Typically “as interest rates go up, you would see a decline in house prices,” senior deputy governor Carolyn Rogers told the parliamentary committee on Thursday. “But because we have sort of a chronic, structural shortage of housing in Canada, we haven’t seen that sort of offset.”

Both Mr. Macklem and Ms. Rogers batted away questions about when the Bank of Canada will lower interest rates. Last week, the bank held its policy interest rate at 5 per cent for the fourth consecutive time. It dialled back its threats of additional rate hikes, but said that it was too early to start talking about easing monetary policy.

Bay Street analysts and financial markets are betting the central bank will start cutting rates in the first half of 2024, with most pointing to the June rate announcement as the mostly likely date. Earlier this week, former Bank of Canada deputy governor Paul Beaudry, who left the bank last summer, said he thought a July rate cut was more likely.

“We can’t put it on the calendar,” Mr. Macklem said Thursday. “We need to see how inflation evolves.”

The bank’s latest forecast sees annual CPI inflation hovering around 3 per cent until the middle of 2024, before dropping to 2.5 per cent by the end of the year, and back to the bank’s 2-per-cent target sometime next year.

A big part of getting inflation back under control will involve getting a handle on increasing shelter costs. But here, the central bank faces several dilemmas.

Lower interest rates will be a relief to homeowners with variable-rate mortgages and fixed-rate mortgages coming up for renewal. But any hint of rate cuts could spark another run-up in home prices. That happened last spring when the Bank of Canada first announced a “conditional pause” to monetary policy tightening, which ultimately contributed to the bank’s decision to hike interest rates two more times last summer.

High interest rates also discourage new home construction by increasing costs for developers and reducing demand for preconstruction sales. This is showing up in a decline in housing starts. In effect, the bank’s efforts to reduce demand in the short-run could have a negative impact on longer-term supply.

Mr. Macklem downplayed this dynamic, arguing that there was a worthwhile tradeoff, at least from the perspective of controlling inflation.

“Yes, there is an impact on the supply side,” he told members of Parliament, referring to higher interest rates. “Developers have pointed that out. But when we look at the sector as a whole, the impact on demand is much stronger than on the supply side.”

In the medium-term, governments at all levels – federal, provincial and municipal – need to do more to encourage home construction while avoiding policies that increase demand for housing, Mr. Macklem said.

“Things that improve supply will be particularly helpful in the current situation … speeding up permitting, taking some of the uncertainty out of the process, making it more predictable.”

Federal and provincial governments have announced several policy changes in recent months aimed at boosting construction. This includes cutting taxes on new purpose-built rental units and increasing funding available to builders by expanding Canada’s mortgage securitization system.

The federal government has also taken steps to reduce demand on rental housing by capping the number of international students permitted to study in Canada. Last week, Ottawa said it would approve around 360,000 undergraduate study permits in 2024, a 35-per-cent reduction from last year.

Mr. Macklem said in an interview with The Canadian Press last week that the cap “will help take a bit of pressure off rents going forward.”

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