Article originally appeared on BNN.ca July 5, 2017
With the markets keenly eyeing the Bank of Canada’s interest rate decision on July 12, the Fraser Institute says the housing bubble currently growing in Ontario is a side-effect of the bank’s own monetary policy.
“I think the bank has tried to engineer an export-led recovery, through lower interest rates and a lower dollar… Instead of getting an export-led boom, we got a housing bubble,” author of the Institute’s Wednesday report ‘Ontario’s One Cylinder Economy: Housing in Toronto and Weak Business Investment’ Philip Cross told BNN in an interview on Wednesday.
“That is not what the Bank of Canada wanted, but somehow they’re going to have to put that genie back in the bottle.”
Cross – also former chief economic analyst for Statistics Canada – stated in the report that housing accounted for over 29 per cent of the province’s income growth in 2016
This data does not factor in a spike in both housing prices and housing starts, causing the report’s author to sound the alarm.
“Historically housing accounts for five-to-seven per cent of Ontario’s economy. So, when it contributes 29 per cent of growth over the past year, that shows a couple things,” Cross said.
“On the one hand it shows just how rapidly housing is expanding but it also shows that the rest of the economy isn’t doing much of anything.”
A reliance on housing without growth in manufacturing or business investment is the real threat to Ontario’s economy, Cross warned.
In the report, Cross stressed that Ontario’s high cost of doing business has severely shrunk the sector’s share of the provincial economy, from 21.7 per cent in 2002 to 12.1 per cent in 2015.
“That’s the flip side of this story,” Cross told BNN. “Yes, housing is doing very well in Ontario, but important sectors of the economy – notably business investment and manufacturing exports – are not doing much of anything at all.
“So, inevitably this is going to increase the space that housing could occupy in Ontario’s economy.”
BMO Capital Markets Chief Economist Doug Porter agreed that there’s no doubt housing and related industries have accounted for an outsized share of Ontario’s growth over the past year.
“That’s not an argument against taking steps to cool a market that was on the verge of becoming a runaway freight train — policymakers can’t stand idly by while a bubble forms. And, as housing cools, there is the chance that another sector will step up to support growth,” Porter told BNN via email.
Cross also believes that the housing bubble bursting would not have catastrophic consequences for the province.
“The Toronto housing market has deflated a couple times before. We saw it at the end of the 1970s, we saw it in the early 1990s and there was no lasting damage to the banking system,” Cross said. “So, as long as you protect the banking system, you’re not going to have a really catastrophic situation.”