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Opinion: Is the central bank afraid to take control of residential monsters?

Are you nervous about igniting a recession by working on a business that seems too big to fail?

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Canada’s housing sector has become an oversized giant in the country’s economy. And during the pandemic, that power was further distorted, with investors now accounting for one in five Canadian buyers and even higher in Toronto and Vancouver.

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As house prices and inflation continue to rise, Canada’s central bank seems wary of curbing the bloated housing industry with high interest rates. Are you nervous about igniting a recession by working on a business that seems too big to fail?

John Richards, a professor of public policy at Simon Fraser University, said the Bank of Canada and the Federal Treasury took the country’s own recession in 2008, triggered by U.S. speculators robbing ridiculously dangerous mortgages. I believe that I am “paralyzed” by the fear of causing it.

Bank of Canada and Ottawa politicians “we were able to stop speculative frenzy, raise interest rates, tighten mortgage rules, and impose capital gains taxes on flips,” Richards said. “But such policies can cause a recession. Therefore, central banks pose a threat. But it doesn’t work.”

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By all means, the central bank’s overnight lending rate is only 0.25%, and there are every sign that the housing industry is contributing to the runaway in this economy, profit-taking bank and employment-rich country. .. It depends more than almost anywhere.

“The central bank poses a threat, but it doesn't work,” says SFU professor John Richards.
“The central bank poses a threat, but it doesn’t work,” says SFU professor John Richards. Photo by Chris Watty / /Reuters

Residential real estate in Canada was worth $ 6.1 trillion in 2020. So, the value of Canadian single-family homes and condominium towers is now 300% higher than GDP, says Canadian housing analyst Stephen Punwashi. In contrast, US homes are worth 170 percent of GDP. Punwashi naturally calls the situation in Canada “amazing.”

Due to the enthusiasm of domestic and foreign investors entering the Canadian housing market up to COVID-19 and between COVID-19, Swiss investment bank UBS says Greater Toronto currently has the second most vulnerable housing bubble in the world. It states that it is. The Metro Vancouver bubble is the sixth worst.

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Canadians are now investing more in homes than in businesses. In the first three months of this year, a staggering $ 248 billion has been invested in Canadian residential real estate, according to Punwasi. This was a 42% surge compared to the same period last year. Avid speculators expect home prices to continue to rise.

Canada’s overall inflation rate is currently 4.7% per year, the highest in almost 20 years. Inflation in Canada’s home prices is even more exaggerated — in October, prices were 18% higher than they were a year ago.

In a recent Ipsos poll, four out of five Canadians say that affordability is their number one concern. “We’re having a hard time paying for very expensive real estate in our major cities, and we’re having a hard time setting up and nurturing families that people took for granted,” said Ipsos Public Affairs CEO. One Darrell Bricker said.

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If the housing investment bubble bursts, it could have a devastating impact on some investors and parts of the economy, especially in British Columbia.

Although the state’s population is only 13%, Punwasi states that it accounts for 24% of the country’s total housing stock value.

Bank of Canada Deputy Governor Paul Budry last week expressed concern about how investors would flood their homes. “It can expose the market to a higher chance of modification,” he said. “And if that happens, the damage can extend far beyond investors.”

But as Vancouver housing market analyst Steve Saretsky says, the Bank of Canada has encouraged people to set very low interest rates during a pandemic and pour money into housing through a process known as quantitative easing. We are not responsible for the method you urged. We are effectively printing $ 5 billion worth of new money each week to stop the slowdown. The bank said it would finally stop doing so.

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Developers and most politicians say the answer to the housing crisis is to build more housing supplies. But reflecting the steps the Bank of Canada and various governments, especially the imaginative British Columbia, have taken to make homes more affordable, Saletsky said this week: Despite recording speculative taxes, mortgage stress tests, and the completion of new homes, home prices continue to rise. We tried everything but raised the cost of borrowing money. Imagine. “

Raising interest rates is not a new idea to break the tide. The Reserve Bank of Australia recently acknowledged that chronically low interest rates are a major factor pushing up national home prices. Because they offer large mortgages to their customers with low payment schedules.

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Even the slightest interest rate hike has made a big difference in Canadian housing. “Remember that 2018 mortgage rates reached 3.5% and everyone thought they would be 4%? What happened that year?” Saletsky asks.

“Home sales in Greater Vancouver have fallen to their lowest levels in 18 years. In the Greater Toronto Area, home sales have fallen to their lowest totals in the last decade. Higher borrowing costs have led to two higher levels. It’s no wonder that the utilized housing market was sluggish. “

The Bank of Canada now suggests that it is at least concerned about affordable housing and inflationary rates, and there are recent signs that some home investors may be relieving mania. .. Meanwhile, home prices have long remained stubbornly out of reach of wage earners in most cities.

Economic agitation continues while the Bank of Canada waits to determine if it will actually raise rates.

dtodd@postmedia.com

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Opinion: Is the central bank afraid to take control of residential monsters?

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