Finance Committee on Oct. 30th, 2018

[Carolyn A. Wilkins]

It's difficult for us to determine any other rate than the overnight rate that works through the transition mechanism, but the point you're making is that, because people might be trapped in a sense with the lender, they may get a less favourable rate than if they could switch. There are a number of mechanisms that even existing lenders can use to ease the transition, including changing the adjustment period. According to the work we've done, there will still be people who, at the time of renewal—say, in 2019 if you had a five-year fixed mortgage in 2014—in fact won't see a very large increase in their debt service ratio. Some will, if they're already highly indebted.

From an overall macroeconomic point of view, we know that it's a difficult transition, but we take that differential impact into account—depending on how indebted you are, when you had your mortgage and when you need to renew your mortgage—when we make our decisions for interest rates. We don't just look at the average when it comes to what banks actually do. That's a question for the design of the policy, which is not our responsibility.

[Blake Richards]

Can I ask, then, on that question—

[The Chair, Liberal, Wayne Easter]

I'm sorry, Blake, we're at.... Go ahead, a quick supplementary.

[Blake Richards]

It's a really brief one.

I understand that you're saying it's not something you would look at. Might it be something that would be worthwhile for us to look at? Would you say that it would be a question worth our consideration?

[Stephen S. Poloz]

It may be a question to put to the banks or the financial institutions more generally, I should say. I haven't been picking up complaints of that sort. I think any bank would realize that if they were treating a customer as trapped it would instantly be known. I don't think it's a great strategy for any bank to follow.

In any case, it's pretty hard for us to track those kinds of details.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Julian, you have seven minutes.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you, Mr. Chair.

Thanks for being here.

I want to have you address the issue of regional variations. You mentioned in the monetary policy report a pronounced decline in house prices in certain regions.

I, of course, represent a riding in the Lower Mainland of British Columbia. Rising interest rates have provoked a lot of hardship. These are people who have a high debt ratio; there is no doubt. That's because wages have basically stagnated. We've seen a marked increase in the housing market and the price of housing.

The net impact has been.... Certainly in my area, from New Westminster and Burnaby into Vancouver, about 20,000 housing units are empty. They're being bought by speculators or offshore money. Because of higher interest rates, they are no longer available for folks who have an average salary.

Could you speak to that regional variation? I understand the overall national perspective, but in some regions of this country that increase in interest rates has a more pronounced impact than in others, because of the fact that housing prices are so high to begin with.

[Stephen S. Poloz]

There's no question that affordability varies a great deal across the regions. Therefore, we get really high mortgage debt in places where houses are more expensive, especially Vancouver, but Toronto was following in Vancouver's footsteps two years ago.

At that time, we had a very strong speculative element running through both markets: bidding wars, prices rising, multiple people bidding on a thing and the price going up enormously.

The presumption was, “I can still do this because I know I'll get the mortgage.” This was one of the symptoms of a period when interest rates had been very low for a very long time. People come to count on that. Throughout that period, there were of course other changes in policies: not just the interest rates, the B-20 guideline, but also some special taxes implemented in your own area, as well as in Toronto.

Disentangling what was responsible for what is basically not really possible. We think we have a handle on how much of an effect interest rates are having. Yes, they have a bigger impact on highly indebted households. You're absolutely right, and that's what Carolyn was speaking to.

In fairness, the stress test was designed to help people understand and test themselves as to whether they could cope with what seemed like a reasonable fluctuation in interest rates, of around 200 basis points. We've now done 125 basis points since the bottom. I would think that most people who went through that stress test would be saying, “I'm glad I can pass that test now that interest rates are rising.”

We were talking about it as a good personal practice long before the rules went into place. It was obvious to everyone that interest rates had been very low and would not sustainably stay there.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you for that.

I'd like to address the issue that you mention in the monetary policy report around wage gains. On page 14, you mention that wage gains remained moderate.

When we look at wages for regular folks, generally speaking they have stagnated. What is your impression of the last few years in terms of.... When we take out the wealthiest of Canadians, what overall wage rates...? How have they performed or evolved over the last few years? What do you project, moving forward?

[Carolyn A. Wilkins]

Wage increases, overall, have been very modest over the last few years, and even over the last year, as we were hearing more and more from the companies that we speak to about labour shortages. We still see wage growth in the 2.3% range, which is actually quite modest for this point in a cycle, and that might be representative of many people. It's an average, so some have seen none, but others have seen a lot more.

You have to ask yourself what's happening. Why is that? Almost every country that has an advanced economy is asking itself the same question. There's no silver bullet. Clearly, the puzzle isn't as big as it might seem, because in fact wage growth before was quite a lot stronger. If you actually look at a graph of wage growth in Canada, it has picked up quite a lot over the last couple of years, but it still remains slow.

There are a couple of things going on here. More recently, wage growth may not have been that strong, because productivity growth wasn't that strong. If you're a company wondering if you can afford to pay your workers any more than you do now, even though you're short of workers, it's difficult to do that if you don't have the productivity to go with it.

Another reason is that maybe on the workers' side there are a lot of workers in the gig economy, the informal economy, and in that economy it's harder to bargain for your wage. There may be a little bit less power for people to actually get stronger wages.

When we talk to businesses.... In our forecast—you asked about that—we expect wage growth to strengthen and overall income growth—which includes not only your wage but how many hours you're working—to strengthen as well, to the 3% to 4% range. That corresponds with what companies are telling us. They say they're expecting to have to pay more to get the workers they need, and that's not just in the highest-paying jobs. That's across the board.

[The Chair, Liberal, Wayne Easter]

Mr. Sorbara, go ahead.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Welcome, Governor and Senior Deputy Governor.

The Bank of Canada has long spoken about a hand-off from housing and consumption as principal drivers of economic growth in Canada to business investments and exports. Could you comment on how, with regard to the monetary policy report, business investments and exports are performing within the Canadian context?

[Stephen S. Poloz]

Yes, it's true. We've talked about this for a long time, because it was one of the characteristics of a return home that we felt was central.

During the post-crisis period, with really low interest rates, quite naturally it was housing and consumption that did most of the growing, and businesses demonstrated a reluctance to invest, given the uncertainty about the economic outlook.

We always believed that getting the economy back to a balance point would mean that consumers would take a less active role in the growth picture. They would become contributors but smaller contributors, and businesses would be doing more of the heavy lifting. That transition appears to be under way.

We think it was interrupted by the uncertainty surrounding NAFTA, so we had a double hit there, because we were approaching capacity just when firms should have been beginning to invest. We had the U.S. election and all the uncertainty about NAFTA, so the investment sort of stopped there. Some firms were desperate to invest, and they did, but many postponed those decisions, and that did two things. It meant that we had less investment than we had hoped, and we had less exports than we had hoped, because they were operating at full tilt and couldn't expand to take advantage of growing demand.

Now that the uncertainty is out of the way, we're watching carefully to see how firms respond, and we expect that to happen. Already we have that shift in the numbers. As we already mentioned, the housing sector has slowed, as expected, and consumption almost always goes along with that. It's not a slowdown, but it's slower than what it was.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

The first derivative....

[Stephen S. Poloz]

Yes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

On page nine of the monetary policy report, you talk about “weaker terms of trade”. In the past, we did have a terms of trade shock to the Canadian economy, but now you're talking about “weaker terms of trade”, which I read to mean that the price we are receiving for some of our Canadian resources—principally, Western Canada Select oil from the province of Alberta—is not where it should be at.

I'd like to get some colour on how important it is that we have diversification in markets for our resources. There are some transitory factors impacting WCS in terms of maintenance shutdowns and so forth, but in terms of diversifying our resources to different markets, how important is that to making the terms of trade actually a positive thing for our economy?

[Stephen S. Poloz]

It plays a role, but to put numbers beside that wouldn't be an easy thing. Diversifying our markets is not the base issue. The base issue that we're talking about here is that a number of our commodities.... As you mentioned, WCS is obviously trading at a very low level right now, but so are a number of other exports, mostly metals. We connect this to the uncertainty about the future outlook for China in particular, given the trade actions that have been taken between China and the United States. Trade is slowing, and there are now expectations that the Chinese economy will slow significantly. That usually brings with it lower commodity prices across the board, and that appears to be happening at least at an early stage now.

That is the reason why in this forecast our terms of trade are lower. WCS is an element of our terms of trade, of course, but it's not the only one.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

We've seen and heard about some estimates of the discount costing, on a gross basis, $15 billion to $17 billion in lost revenues, whether it's from the banks downtown....

I would like to follow up. From reading the monetary policy report, we are obviously going through a very strong period of growth in the Canadian economy and in the global economy. A lot of good things are happening. The immigration of highly skilled workers to Canada is very strong. We have the labour demographic issue, obviously, which we talked about extensively.

I'm going to ask a very simple question. What keeps you up at night, Governor?

[Stephen S. Poloz]

It's a popular question. I'd like to give a different answer each time to keep people interested.

I think trade actions.... And I call them “actions" with purpose; they're much more than trade tensions. When concrete actions have been taken, we're shooting with live ammo. It is having effects on economies—not just China and the United States, but other bystanders are being affected. So much of the economic growth we've enjoyed over the last 20 or 25 years has been the result of trade integration. That greatly concerns me.

Cyber risk is the other thing that keeps me awake at night. It's a non-economic answer, but that is the thing where every morning you're thankful you didn't get a phone call during the night.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Of course.

On the trade front, obviously with the application of CETA and with the CPTPP now receiving royal assent, even a free trade agreement with Israel and with other countries.... That is something near and dear to my heart as an economist, that free trade integration continues. The lack of disruption to the supply chains.... Now that the USMCA deal is done—not ratified, but completed—I think it has removed a great deal of uncertainty.

My last comment, if I have more time, is with regard to labour in Canada. I represent York region. The biggest complaint I hear from businesses is a shortage of workers. A Bloomberg story said that Canada is enjoying a boom of people coming to our country, but it still seems not to be enough. Do you have any advice on how to help fill those vacancies?

[Stephen S. Poloz]

This is a matter of getting the right match. Canada is a big place. Other countries, such as Germany, seem to do a better job, but it's usually because most jobs are within a two-hour commute, and we don't have that situation here.

Skills mismatching is often portrayed as gigantic, that the job growth is in the digital economy space and the job losses are in manufacturing, let's say. In fact, there are many vacant jobs in the manufacturing space and many vacant jobs in home building, construction, renovation, maintenance, all those jobs, which are not a large skills gap away from manufacturing skill sets.

I have to believe that geography is playing some role, but it may just be that the business of moving is not as easy, especially when one spouse still has a good job and the other spouse is looking for a job. It could be hard for a family to move.

Those aren't monetary policies, but perhaps some things could be invented.

[The Chair, Liberal, Wayne Easter]

Thank you.

Before I go to Mr. Anderson, I will say that we just did pre-budget consultations. One thing we heard about everywhere was investment capital and the inability of Canada to attract investment capital in the same light as on the American side of the border. It seemed to be due to accelerated depreciation more than anything else, but we heard that a lot.

Have you looked at that in any sense?

[Stephen S. Poloz]

We have not analyzed that particular thing in any detail. We do have in our forecast a factor taken into account because of the differential between those two tax treatments in Canada and the U.S. It is one of the reasons why our investment profile in our forecast is less than it would be according to our normal modelling.

Of course, that is supported by conversations that we, too, have with the companies in the context of our business outlook survey. It seems to be top of mind at this stage. There are lots of other competitiveness challenges that also come into the conversation, but that does seem to be top of mind.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you.

Mr. Anderson, we'll go to five-minute rounds.

[David Anderson, Cypress Hills—Grasslands, CPC]

Thank you, Mr. Chair.

Thank you for being here today.

I come from a ways away from here. I was reminded of that on the weekend when I was at a community supper and a gentleman came up to me and asked if I could ask somebody about the mortgage stress test. He's a realtor, and from his perspective the mortgage stress test was applied as a cudgel to the Vancouver and Toronto markets. He said, “It's killing us out here. It's wrecking our economy. It's costing jobs. The construction industry is slowing down. The real estate market is slowing down. It's actually damaging our communities. Can you get somebody to give me an answer to that?”

I guess I have the opportunity this afternoon to ask you about the negative impacts of the mortgage stress test on local markets that aren't in the Vancouver and Toronto areas.