Finance Committee on April 18th, 2023

[Carolyn Rogers, Senior Deputy Governor, Bank of Canada]

Those are decisions that individual lenders make. I think the extension of amortization periods, as long as they're within their existing risk policies.... I know that OSFI pays close attention to these things, but I don't think these are policies that are outside their normal product lines.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay.

[Carolyn Rogers]

I don't think there was a change to consult on, to be very direct about your question.

[Adam Chambers, Conservative, Simcoe North, ON]

Does it concern you that some lenders now have 20% to 25% of their mortgage portfolios with amortizations that are well beyond 40 years?

[Carolyn Rogers]

We actually met with some banks last week. We asked this specific question. It's something we keep an eye on, for sure. What they told us is that these are borrowers they're working with. It depends very much on the borrower's situation and what the available options are. Some of them are refinancing, some of them are paying down their mortgage and some of them are looking at payment adjustments. I think the banks are acutely aware that mortgages not getting paid down and not amortizing down is not a sustainable situation over the long term, but as we understand it, they're working closely with these borrowers.

This is something we've provided analysis on. There's a bit of analysis in box 3 in the MPR. We have our financial systems report, which we'll deliver in May. You'll see us provide a bit more analysis on the mortgage market there.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you. We look forward to that.

You have a job to do. So does OSFI, and so do other bodies in the regulatory system. However, when decisions are made, it impacts other parts of the system. For example, we know the positive trade-offs with a decision like that, but there are also negative trade-offs with a decision like that, including not allowing demand to come down in certain circumstances or putting a price level under housing.

A lot of people are not in the housing market right now, especially young people, who are saying the system is completely rigged against them. There were low interest rates for over a decade. People kind of gorged on debt and supported the incredible supercharging of the real estate sector and investments in the real estate sector. Canada has, in terms of percentage of GDP, one of the highest amounts of GDP as investment in residential real estate, and and now, when the system should be correcting and prices could come down, the system is keeping prices a little higher. The real estate market has just recently, in a couple of months, gone back up in value in certain markets, because nobody is listing their house. There are lots of pressures on that system, and there are positive and negative trade-offs. We appreciate the bank's view on this and look forward to some of the future work you do.

In my last minute, I would like to switch to productivity, because it was brought up. We measure standard of living by GDP per capita, but that measure is quite poor in Canada. We're really just doing growth by volume. The pie is growing, but everybody's slice of the pie is remaining the same. One of the pressures on house prices and demand, as I think you note in the report, is about increasing, over the long term, supply potential with population growth. In the short term, does that not create challenges as a headwind for demand in general goods and services and for real estate?

[Carolyn Rogers]

Yes. Immigration, as with many policies, has effects on both supply and demand. We note that in the monetary policy report.

Immigration will increase the labour supply, and that's a good thing. It will help relieve the tightness in the labour market. It also helps increase potential over the long term, but it is also the case in immigration that immigrants buy houses, as you note. They add to demand, so in an economy that's already in excess demand, adding immigration will add to both sides. It doesn't necessarily relieve the excess demand. It will add both supply and demand pressures.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Chambers.

Now we will move over to MP MacDonald for five minutes, please.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair.

Governor, I think I ask you about the provinces in relation to economic growth and their contribution to inflation each and every time you come in here, so I'm not going to break my trend. Could you comment on the fiscal positions of the provinces and territories relative to the federal government at the present time?

[Tiff Macklem]

I want to go back to the very first thing I said. Fiscal decisions are the decisions of governments, of Parliament, and we're going to leave it to them.

What I can say, as I did in my response to the first question, is that we take the spending plans of federal and provincial governments as given. We put those in our projection and work out what the implications are for real growth and for inflation and ultimately what we need to do with interest rates to get inflation back to target.

There have been a host of provincial budgets and a federal budget. We took those and put them into our projection, and they added about $25 billion of additional spending over the next three years. About three-quarters of that was coming from provincial budgets and about one-quarter from the federal budget.

[Heath MacDonald, Liberal, Malpeque, PE]

On the $25 billion, is the quarter of it that comes from the provincial governments standard from year to year?

[Tiff Macklem]

No. That will vary from year to year.

During the pandemic, for example, the provincial and federal governments were expanding their spending considerably to support the economy when it was in a very dire situation, and the federal spending was bigger than the provincial through that period. It will vary.

[Heath MacDonald, Liberal, Malpeque, PE]

It's 98¢ per dollar, basically, in my home province.

Do you currently foresee any challenges or disruptions on the horizon that may disrupt or trend downwards the inflation we've seen in recent months?

[Tiff Macklem]

There are some risks, and I think we highlighted them in our report.

As I mentioned in my opening statement, inflation is coming down pretty quickly, and most of that decline is coming from goods prices. There have been big declines in energy prices, and global supply chains have improved. We're also seeing the effects of monetary policy on interest-sensitive items, the things that people usually buy on credit, like furniture or appliances, and houses, obviously, which we were just talking about, but what is taking longer is service price inflation.

Part of that is to be expected. Services were the last part to recover. People are still trying to catch up in some of the services they missed during the pandemic, and monetary policy takes longer to work on services. However, we're not going to get inflation down to 2% if we don't get service price inflation down. Coming back to your question, labour input costs are a big part of providing services. We need wage growth to moderate. We need service price inflation to come down.

The other thing we're really watching closely is the behaviour of companies. When inflation was really high, what we saw was that companies were increasing their prices much more frequently and by much more. What we've started to see is that this is beginning to normalize. Those price increases are less frequent and not as much, but they're not normal yet.

When you talk to companies, what you hear is, “Yes, we still have some cost pressures and we're passing those on.” That's because the economy is in excess demand. When companies are not worried about losing customers, they just pass on those prices. It's starting to normalize, but that's something we need to watch closely.

We're moving in the right direction, but we're not there yet, and there are some more things we have to see before we're going to get there.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

Our activity data is up, we've been trending downward for the past nine months, we've created 200,000 jobs in three months and we're seeing wage growth. We now have the second-lowest inflation rate in the G7 next to Japan.

Just quickly—we don't have much time—can you briefly describe the resiliency of our economy?

[Tiff Macklem]

You mentioned international comparisons. Look, this has been a very difficult couple of years for Canadians, and Canadians are still feeling the effects of inflation, but if you compare Canada against other similar countries—our country peers—we do look pretty good. Growth in Canada has been among the strongest. Inflation, while it's certainly too high, other than in Japan, is the lowest in the G7. That doesn't really help Canadians feel any better, but I think if you compare us to other countries, yes, Canada has been doing reasonably well.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP MacDonald.

Now we'll go to MP Ste-Marie, please, for two and a half minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Economist Willem H. Buiter, who has worked at Citigroup and on the Bank of England's Monetary Policy Committee, suggests that central banks abandon paper money and migrate to a fully digital or virtual currency.

The argument he makes, based on the International Monetary Fund's, or IMF's, World Economic Outlook, is that it is plausible that we will return to a low interest rate monetary policy in a few years. His view is that, for central banks to have better tools, there could be a negative interest rate, which is difficult to implement with paper money, but not with a digital or virtual currency.

I don't really agree with his analysis, but I'd like to hear your thoughts on this possibility and where you are at in evaluating it.

[Tiff Macklem]

The short answer is that we are a long way from Mr. Buiter's world.

We will have banknotes for a long time to come. Canadians love their banknotes, and that is very important to everyday life.

However, the important question that arises is whether it would be a good idea to give Canadians access to a central bank digital currency. We are considering that question closely.

Different aspects must be considered in our research. In particular, questions need to be asked about potential benefits and about the impact that a central bank digital currency would have on the financial system. Technical questions also arise. If we were to take such an approach, it would be very important that it work really well, that security be very high and that access for Canadians be broad.

Those are the two types of questions we are considering. However, things are still in the research and development stage. No decision has been made to date, and I want to emphasize that the decision to adopt a Bank of Canada digital currency would rest with Parliament.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we'll go to MP Blaikie, please, for two and a half minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you.

I want to talk a bit more about the housing market. We've seen in Canada for decades now that as interest rates declined—as they did for a long time from the mid-nineties until recently—people whose real wages weren't growing were nevertheless able to bid more to buy a home. They were able to leverage more out of their earnings.

House prices steadily increased. We saw a real explosion during the pandemic, partly because people weren't spending money on other things so they had more money to spend on a home. There was elevated demand because people were now going to spend a lot more time in their homes. They wanted more space; they wanted different kinds of space. Virtual work made possible new areas to live in while keeping the same job. Frankly, there were a lot of couples who broke up during the pandemic too, and that created a certain kind of housing demand, as well as families now requiring two homes instead of one.

Nevertheless, there was a trajectory, pretty steady and pretty quick, of price increases within the housing market. There were also institutional investors moving into the residential housing space as well in a number of different ways, both for single-family dwellings and for larger apartment blocks and things like that.

We haven't done anything to address investment activity in the residential sector. I'm wondering what the bank's opinion is on this if rates start to come down sometime in the next 12 months. As inflation returns to the target range—I think you said by the end of 2024, but we might see 3% sometime in the relatively near future—doesn't that mean the pattern just resumes? Lower interest rates mean that Canadians are able to bid higher on the price of homes, and they'll certainly be encouraged to do that by real estate agents and other actors in that space. What does it mean for the housing crisis to have rates go down again?

[Carolyn Rogers]

As you said, there have been a number of things affecting the dynamics in the housing market, and low interest rates are one. Most people who buy a home buy on credit, so when interest rates are low, you can buy more house.

There was the surge during the pandemic. As you pointed out, there were some shifts in demand and in the types of housing that people were looking for, and to my previous question with MP Chambers, there was the effect of immigration on housing for sure.

The one thing that has been constant throughout is there is not enough supply of housing. It's really a fundamental law of economics: If there's more demand for something than there is supply, there's going to be pressure on prices.

We need, over the long term, to deal with housing supply. That will be one of the most important things to relieve pressure. It is encouraging to see different levels of government pursuing a variety of programs to deal with supply, but that is something the bank has pointed out for quite a long time now.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Blaikie.

Now we'll go to the Conservatives.

We'll have MP Morantz, please, for five minutes.