Fraser Forum

Artificially lowered interest rates major cause of increased housing prices

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Housing prices in Vancouver have gotten a lot of attention over the last few years. According to Demographia, the City of Vancouver is the most expensive place to live in North America, with a median income of $69,700 and a median home price of $756,200.

And prices continue to rise—last year alone, home prices in Vancouver rose 30 per cent. 

The disconnect between incomes and home prices strongly suggest demand for homes is coming from outside the city. Indeed, one study from the University of British Columbia found that about 70 per cent of recent home purchases on the West Side of Vancouver came from buyers in Mainland China, many of whom were described as "housewives" and "students."

Prices in Toronto have also skyrocketed, with the average home value in the GTA appreciating by more than $100,000 in just one year.

There have been all kinds of suggested causes and potential fixes. Some have blamed globalization, assignment clauses that facilitates house flipping, lax immigration policies and government investment astronaut" families, and income inequality. The solutions then follow: increase production of "affordable" housing and rental units, and regulate foreign housing purchases by imposing a "speculation" tax, putting limits on resale prices, instituting property transfer taxes, and paradoxically, increasing minimum down payments.  

But demand from China and elsewhere is not the cause of high housing prices, but a symptom. Rather, the primary cause of increased housing prices, both in Canada and abroad, is the expansion of the money supply. That is, the Bank of Canada and other central banks around the world have artificially lowered interest rates, making investment and risk-taking in assets, such as housing, much cheaper. 

And Canadians welcomed it.

In 2008, as the world economy faced a massive restructuring, with resources misallocated into real estate and financial institutions, the Bank of Canada avoided the necessary correction by dramatically cutting interest rates. The move, implicitly supported by Canadians, served to artificially prop up the stock market, home prices and employment. Buoyed by low interest rates, Canadian governments racked up more and more debt, while Canadians went out and bought bigger homes. 

In 2015, the Bank of Canada lowered interest rates further, ostensibly to fight off recessionary winds and to protect Canadian export industries from a rising loonie. Again, Canadians have been supportive, just recently voting in Prime Minister Justin Trudeau who has doubled down on the virtues of deficit spending, which low interest rates make possible. In its first budget the Trudeau government looked to ramp up deficits to the tune of $113 billion in just five years. Likewise, the once popular governments in Alberta and Ontario continue their spending sprees.

The long run fruit of all of this is not just escalating housing prices and affordability issues, but also far greater income inequality, as those connected with the banking system are more able to take advantage of the easy money, as well as protect themselves against ensuing inflation. While the correction has temporarily been put off, at some point all this debt and leveraging will have to be paid.

If Canadians wanted to be "saved" from having to address difficult fiscal realities, bear plummeting stock portfolios, and endure a recession, they got what they asked for.


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