A rise in interest rates and a ‘healthy’ fall in prices could save debt-strapped Canadians, bank CEO says.
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Canadian housing prices could fall as much as 15 per cent should interest rates climb, which would be “healthy” for the country’s economy, Royal Bank of Canada Chief Executive Officer David McKay said.
“There could be some price correction, particularly in a rising rate environment,” McKay said Thursday in an interview at the bank’s Toronto headquarters. “I don’t see it to the extent that the Bank of Canada does, but I do think you could have a 10 to 15 per cent price correction.”
Canada’s central bank said Dec. 10 that housing prices are overvalued by as much as 30 per cent. Bank of Canada Governor Stephen Poloz warned this month that indebted households and high housing prices pose a risk to the financial system even as the country isn’t in a housing bubble.
Royal Bank and other large Canadian lenders have posted record profits in recent years as homeowners took advantage of the lowest mortgage rates in decades, fuelling housing prices and an expanding real estate market.
Bank of Canada’s policy interest rate has been at 1 per cent since September 2010. The central bank may start raising its overnight lending rate in the fourth quarter of 2015, according to a Bloomberg survey of economists.
“The catalyst is very low rates, ultra low rates, strong demand and lack of supply creation,” said McKay, who led the bank’s consumer-lending business before becoming CEO on Aug. 1. “Demand is there, supply’s not, and low interest rates stimulate price wars still.”
The borrowing has left Canadians with record levels of debt, prompting warnings from policy-makers and the central bank about over indebted consumers and elevated housing prices. Canada’s ratio of household debt to disposable income rose to a record between July and September.
“I do not believe it will end badly,” McKay said. “A slowing market is absolutely a healthy thing right now, so we’re not concerned.”
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