20
votes
Canadian interest rate increases = stave off the housing bubble (or create a spectacular burst?)
Do you guys think they're using rate increases to kill off all the overleveraged homeowners in an effort to create a sell-off and thereby lower housing costs?
Could someone smarter than I please explain what is going on... or is our inflation that bad? Seems like some of the inflation might be what I've read as greedflation. I didn't realize we jumped almost 3.75% in less than a year last year...
Bank of Canada, or any central bank, uses it’s control over interest rates to target a level of inflation (usually 2%). When inflation is higher than the target, it adjusts rates upward to reduce spending and therefore inflation. When it’s lower, it adjusts rates lower to incentivize spending.
This is completely detached from what's going on in the housing market even though shelter is included in the CPI. For example, many people thought Canadian real estate was in a bubble from 2010-2020 and rates actually came down during several times during that time frame because even though housing was up, inflation in the CPI was below the 2% target.
I would totally agree with you if you replace "houses" with "minimum wage accessible housing" - it doesn't have to be SFHs, and it doesn't even have to be purchased: if the country or province itself owns a ton of rent controlled units to rent out at truly accessible rates, we can also see house prices stop rising as steeply without building a single house more.
I don't think they meant only a literal single family house, but any kind of housing.
The number is what matters. Price controls just lead to shortages unless supply and demand meet. In practice, the countries with affordable housing do so via the private market, namely Germany and Japan. What the government does well there is a) get out of the way of developers b) (metaphorically) bulldoze over NIMBY opinions.
There are some examples of countries with large scale public housing to this day, namely Singapore, but even then it works differently than what most people imagine. In Singapore, public units are leased out in 99 year contracts that can be bought and sold on the private market. In effect, the government builds houses and then sells them to people, as opposed to continuing to own and maintain the housing, as well as setting the price. The units are priced by the market after the government finishes building them.
Agree with your overall point but we actually have a shrinking population with one of the lower birth rates among Western countries, hence the high levels of immigration.
To add extra context, our birth rate is below replacement levels already. So while obviously not a perfect comparison, it's not like we are adding 500,000 in immigration plus Canadians born in Canada.. If we stopped immigration today our population would be declining.
https://www.cicnews.com/2023/02/why-birth-rates-are-low-in-canada-and-much-of-the-western-world-0232764.html#gs.1v1bh7
I did read an interesting article recently that I cannot track down that suggests there is not actually a labour shortage in Canada. There just remains a delta between wages and what people are willing to be paid.
Regardless, housing is too much. I was lucky to have an inheritance to use when I bought in 2017. I cannot imagine trying to buy a house in a high cost of living area in 2023. You can build all those houses you want, but if the best paying jobs are in Toronto more houses in the Yukon don't help that.
That's 1.67 people per house, which on the face of it seems okay. Would you expect most people to live alone?
But since prices are high, I expect there's more to it.
Canada, like the US, after 2008 has predominately fixed rate interest rates, so increasing interest rates will only harm homeowners insomuch as it would make selling less desirable, as it theoretically depresses prices.
Yes, it's for domestic inflation concerns. "Greedflation" is one of the strangest internet phenomenas, as it definitionally makes no sense. I think people just mean demand pull inflation? There is a mixture of demand pull and supply push in the inflation figures of the US and CA. Although I'm not sure why demand pull inflation is supposed to be less "real" or whatever than supply push inflation.
If you're referring to mortgages, this actually isn't the case. For one, we don't have the option of 30 year fixed mortgages, so even a fixed rate mortgage only lasts 5 years until you have to renew at the new rate. Additionally, at least before the rate increases, a majority of new mortgages were actually variable rate.
THEY HAVE 30-YEAR TERMS??
Like if you locked in a 30-year fixed during the lowest rates, what would have been your interest rate??
I was actually thinking "It's almost nutty how bad the mortgage system is in Canada". But I don't know how it works in other countries, except for a few that do these crazy 100 year mortgages where you never end up owning the property.
Yes, they have 30 year terms. I don't know what kind of rates came with those at the lowest point, I'd guess 2-3% or so? I'm pretty sure if you bought a house in the US from 2019-2021 and you didn't pay cash, you aren't moving for 30 years.
At the very low point, 30 year terms were around 3%. You could get closer to 2% if you did a 15 year term.
To clarify, you're describing a 5 year fixed-term mortgage. 5 year is as, I understand it, as long as they typically go in Canada. Ever since 2008, they were effectively done away with in Canada. This makes home ownership more risky for homeowners, but less risky for banks, and is part of the reason why Canada's banking system is considered more resilient than the US.
A variable rate mortgage updates immediately to the new rate. My neighbours have this. When BoC raises rates, their mortgage interest goes up immediately. Even worse, the bank doesn't notify you of this, and if you just keep paying the same amount, there will be more interest accrued and you may be even going backwards or just treading water.
There's actually two types of what are called 'floating rate' mortgages. Adjustable rate mortgages are what you're describing -- rate goes up and your mortgage payment goes up. Variable rate mortgages, for the most part, will not see a payment increase when rates go up. Instead, they just adjust the amortization and you'll be paying longer, up to some 'trigger rate' at which point your payments will start going up as well.
Greedflation is real
Bread price fixing was a recent thing, and just now has been found to be happening yet again
https://en.m.wikipedia.org/wiki/Bread_price-fixing_in_Canada
This has nothing to do with supply and demand and everything to do with illegal greed
That's not the usual definition, which someone chimed in below
If you want to call price collusion "greedflation", then sure, it's a type of market failure, but it is already illegal and if you can produce evidence for such a thing being widespread, then there would be a fairly clear avenue for a resolution. The "greed" seems like a misnoymer in that case... just call it price collusion?
"Greedflation" refers to the premise that rise in prices being primarily driven by a rise in profit margins (that is, the ratio of profit to cost has increased), and not primarily by an increase in costs or lack of supply.
So, demand pull inflation. If profit margins are increasing, that means that aggregate demand is increasing. I'm not sure why people think supply-push inflation is the only kind of inflation? If anything, demand-pull is much more common.
Most voters are homeowners. They won't do anything to intentionally hurt the bulk of them. All they are interested in doing is to kick the can yet further down the road, and HOPeFuLLy the NDP gets voted in when it finally explodes in all our collective faces,
peoplevoters get angry and bring the Liberals back and swear off NDPs for another 50 years.Many of our MPs own income property and have investments in the industry. There's no way they will try to lower housing costs by doing something that would drastically hurt themselves (financially and politically) and their voting base. Slowing it down is the best case: still rising for them, maintain illusion of "folks just need to eat less avocado toast".
Greedflation.....they'll somewhat tell the oligopolies to tone it down for another quarter IF the people get angry enough. If the people don't then they'll continue to be happy to go golf and vacation with the oligopoly families and toast to another record profit year, while boasting about how great the economy is doing.
On a much less cynical note there really aren't a lot of policies and levers they can pull that won't be political suicide, aside from raising interest rates to cool things somewhat: re-zoning or cutting construction hurdles don't translate into suddenly affordable housing, and even if it does it won't be for many years ahead when they may not survive the next election cycle anyway. Meanwhile they probably honestly do believe if GDP goes up everyone benefits and can pull themselves up by the bootstrap: they probably don't understand that for folks with NO investments, what the market does has nothing to do with us.
The government is not the central bank. They are very much separate entities, and for good reason.
Yea, there's definitely a soft coupling; these people all know each other and have lunch together I'm sure. It's hard to account for those kind of things when we talk about independence but I'm pretty confident there are some hard limits to that relationship though, especially when there's a clear consensus on what should be done re: rate adjustments.