Houses on Coins
Rather unusual prices on some real-estate markets and rising national debt have contributed to inflation. This is a situation that many countries, including our neighbours, the US, are all too familiar with following a housing boom. It seems like it’s impossible to avoid problems once there is too much money on the market. What is the position of the Canadian government and the Bank of Canada? Unlike many others, the Bank of Canada is not planning to impose higher interest rates to fight the boom.
Mark Carney, governor of the Bank of Canada, commented on the situation in an interview with The Wall Street Journal: “You don’t turn to monetary policy first, the principle is that there are other tools that are the best tools to address the risk of excesses developing in housing, and they should be deployed first. In Canada, we have deployed those other tools. As a consequence, we expect moderation in housing activity.” This means that home buyers and banks are the ones to carry the burden of enhanced regulations.
Extreme Rise in Prices
The net real-estate property prices are being pushed up mainly because of the extreme rise in prices in the Greater Vancouver area and Toronto’s increased sales over the last year. According to the estimations of the Canadian Real Estate Association, prices rose by 8.6% in one year. The average price of homes sold in Canada was $376,817. If we exclude the Greater Vancouver area from the equation, prices in the rest of the country rose by 5.6%, while prices in the Greater Vancouver area itself rose by 25.7%. The average price of a home in Vancouver in May was $831,555.
Should the Bank of Canada Regulate?
There is heavy discussion on both the national and international levels about whether national banks should address the issue of asset bubbles created by the housing boom. Although there are still some skeptics who refuse the regulative approach, the fear of the US real-estate bust repeating is strong enough to put things in motion. Israel, China, and Hong Kong are all taking a careful approach. The chief economist at Bank Credit Analyst, Martin Barnes, said: “That is a major shift from five years ago. They have at least acknowledged that they can no longer ignore asset bubbles.”
Higher Interest Rates? Not just yet.
The Bank of Canada, as well as the international community, sees higher interest rates as a last resort. Higher capital standards are being imposed on banks and more complex mortgage insurance requirements are coming into play. Slower growth in the US and a strong Canadian dollar combined will keep interest rates lower for a while.