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New governor gets early opportunity to set out his views


Published: 5 February 2013 | Author: Bernard Clarke

Mark Carney, the next governor of the Bank of England, will give evidence to the Treasury select committee this Thursday. Given his current position as governor of the Bank of Canada, the news of his appointment has generated understandable interest in what lessons and experiences he may bring with him from the Canadian financial markets when he takes over the reins at mid-year.

In the next issue of CML News & Views, we will be taking an in-depth look at Canada’s housing finance market. Canada offers a useful reminder of how global economic and financial factors can shape domestic markets in similar ways, even when institutional arrangements across countries are markedly different (as they are in Canada and the UK). 

Canada experienced a protracted housing boom in the run-up to the global credit crunch and, much like the UK, this was driven by strong demographics, rising employment and real wages, and declining interest rates. Yet the Canadian economy weathered the global recession better than most of the developed world, including the UK, and this partly explains why housing market trends in the two countries have diverged more recently. 

While the UK post-crisis narrative has largely been one of subdued levels of activity, until very recently Canadian mortgage lending has continued to grow strongly, with the growth in house prices outpacing that of incomes.  Indeed, Canada now has one of the most expensive housing markets in the world, according to the house price indicators regularly compiled by The Economist. And, as the chart shows, its households have become heavily indebted – with the ratio of household debt to disposable income in Canada now on a par with recent UK and US levels.

Chart one: Trends in household debt: income ratios, %

 Chart 1: Trends in household debt: income ratios, %

Source: Canada figures from Statistics Canada; other figures from Bank of England Financial Stability Report June 2012

Although Canada has a reputation for having a financial sector that is conservative and well-regulated, the issue of whether the Canadian housing market can achieve a soft landing remains a question rather than a certainty.

As Mark Carney looks ahead to his new role, both the similarities and the differences across the Canadian and UK markets (and not just the housing market) are bound to be of interest not only to him, but to those commentators seeking to second-guess what steps he may seek to take as governor of the Bank of England.

But market comparisons are complex, and importing particular policy levers is rarely straightforward in terms of anticipating their results effectively against a different market backdrop. We would therefore be surprised if indications about housing finance market reform loom large at this early stage. However, like others, we will be fascinated to gain an early insight into the incoming governor’s views. And you can gain an understanding into how the Canadian market operates in more detail in the next issue of CML News & Views.