Housing imbalances continue to worsen

Nothing illustrates the regional divergence in Canada’s economy like housing. While house prices continue to surge in the already most over-valued markets in Vancouver and Toronto, Calgary and other areas most affected by the collapse in commodity prices are already seeing a decline in house prices. These diverging trends spell trouble for policymakers as they contemplate alternative plans to stabilise the economy. In the near-term, housing bubbles in Vancouver and Toronto could constrain the Bank of Canada’s willingness to provide more monetary stimulus. When these bubbles inevitably burst, however, the Bank will need to change tack but will be unable to do much with interest rates already close to zero. In both cases, the burden will fall mostly on fiscal policy.