It constantly seems like the BoC and the Government are at odds when it comes to inflation. Government spends, gives out cash to help (grocery rebate program) and the BoC raises rates. I guess the grocery rebate is aimed at lower incomes, and it’s redistribution, but that’s not the only example.
The fund and spend, but not too much growth conflict throws me for a loop.
>The fund and spend, but not too much growth conflict throws me for a loop.
This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.
I don't want to delve into politics, but I would not call the BoC unaccountable. Their goal is to juggle employment and inflation by setting the interest rates. Inflation is/was high and unemployment was low, that calls for increased interest rates (especially as the US is raising rates anyway).
The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so.
Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
> Have the people of Canada been asked what the best balance of inflation and unemployment is?
I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party.
The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.
In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around.
On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at)
This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank.
Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case.
I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money.
[0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting
[1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.
> In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around.
Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
If it's coming from tax dollars, it's increasing the amount some people can spend on consumer electronics and used cars while also decreasing the amount that other people can spend on houses, vacations, and new cars. So the net impact should be roughly zero, assuming that the taxes don't meaningfully affect supply. However, with pandemic rate cuts, much of it came from newly-created loan money (either borrowed by the government, or by businesses and individuals), meaning cheap loans for cars and houses drove those prices up at the same time that consumer goods were also in high demand.
To pose a question to think about: what inflation are we talking about exactly?
Short term inflation (usually horizon of less than 18 months) can significantly increase due to demand outstripping supply, absolutely. Market efficiency though, should cause rapid normalization and eventually prices will fall due to competition, at least in a healthy functioning market economy (that's another debate).
That said, I'm considering what drives long term inflation, which extends beyond an 18 month horizon. We're approaching year 3 of dramatically increasing inflation across the board, and one of the only mechanisms we have at that point is driving up the cost of new money and allowing that to ripple across the economy. So much of our economic system is centrally based around borrowing, whether its cars, homes, business expansion etc. These decisions are in part, driven by cost. When the cost of borrowing is lower, its easier to spend higher sums and drive long term inflation. It also lends people to seek greater and greater returns with "cheap money", driving these boom bust cycles.
My general argument is long term inflation is driven by cheap money, and short term inflation that may be caused by government assistance is just that - short term, and measurable, and should, in a functioning market, normalize itself away.
tl;dr, demand side inflation naturally curbs since high demand outstripping supply will natural raise prices to an equilibrium, and bring them back down as it cools off, supply side inflation is more opaque in reality, esp. when it comes to controlling borrowing costs (IE, creating new money)
It's not that you omitted nuance, it's that your basic premise - "cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around" - is fundamentally incorrect, and goes against both economic theory, and lived experience over the last few years post COVID.
> Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case.
This is also probably why you're getting down voted - it's just wrong
1. taxation, either explicit or implicit through interest rate manipulation, doesn't impact monetary supply at the scale we're talking about here. It impacts the cost of, and therefore the availability of capital.
2. cash assistance to the poor isn't a simple "take $100 from Peter and give it to Paul" transaction. It transforms capital (what taxes impact) into money. This is a weird distinction, but capital isn't money. Think of it as two separate streams - there's a fictionalized capital stream of stock markets etc, and a "real world" money stream that interacts with good and services.
3. Cash assistance to the poor directly drives inflation because the demand for goods is decoupled from reality. By giving cash to the poor, you generate increased demand for the same amount of goods and services. This is econ 101 - demand goes up, prices go up. Because the monetary supply has been manipulated by injections from capital, this demand is decoupled from the cycles that would tamp it down.
Let me repeat that: a sudden increase in demand, coupled with more money in the system, decouples prices from the systems that keep them in place and drives inflation.
If you'd like an object lesson in this, I'd refer you to the past 3 years of experimentation with wealth transfers in the US, and the current inflation as a result of that.
Edit to add - I make no moral statements here. I think that cash assistance to the poor _is_ generally the least bad option of government assistance; however, we should be clear eyed about the costs of these actions, and not hand wave them away, only to be shocked, shocked, shocked, when those costs come due.
The past 3 years of experimentation of wealth transfer has wholly benefited the wealthy and corporations by a large margin. Direct cash assistance[0] in total cost is less than what just the PPP loans ended up costing the government, for example. This actually would be a great example of government spending that does cause inflation[1][2] and largely did not benefit the middle class (let alone the poor).
Cash assistance to the poor / middle class is more murky. While yes, short term inflation in part was driven by the broad relief payments[3], it is sustained by cheap money[4].
My argument is centrally that cash assistance to the poor and middle class, broadly, won't sustain inflation as prices rise and demand normalizes, as an efficient market should do. The distortion on that market happens with a combination of low interests, which drives cheap capital creation, which distorts natural price normalization, and fuels riskier investments, which are all observable economic cycles.
My conclusion, based on what I understand and evidence there in, is that cash assistance, especially in limited one shot capacity, is not going to sustain inflation at the pace we've been seeing it most broadly. One particular note is PPP loans (which were largely forgiven) + "cheap money" is a big driver in being able to sustain higher prices via "buffing" the balance sheets of businesses. If I can sustain demand loss at a higher price because my operating costs dropped significantly due to cheap (or in some cases "free") money, you've just distorted the market.
In a healthy environment, high prices should naturally have lead to lower demand, which would kick off the deflation cycle, which in a certain band, is healthy for the economy as a whole.
This is why there's arguments over whether interests rising more dramatically is the "right tool for the job".
To be honest, I'm not sure our understanding differs that much on this aspect, only in as so far as I am less critical of direct cash assistance to the poor / middle class than the assistance given to wealthy / corporations (in, for instance, form of PPP loans). I also don't think that cash assistance is the real long term driver of inflation at this stage.
I'd also like to note, I wasn't talking about pandemic relief per se, I was more talking about general cash assistance that you would typically see in welfare programs, which is provided via taxation, usually.
The independent actions are impacting different parts of the market.
The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis.
Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages.
(now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)
Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion.
In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist.
In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government.
But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt.
I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing.
It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.
I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan. We see calls to limit the wages of those working people as if it's their income driving commodity prices up.
However we see both minimum wage and pensions increasing 10%+. Now sure those on minimum wage will spend it on something frivolous like food, but those on indexed linked pensions, who already pay far less tax per pound received than a working person, have even more money to spend.
Roll NI into Income tax, it will raise money spent and take it from those who actually have money to spare and are thus driving inflation by created demand where supply can't keep up. Throw in a land value tax to encourage people to utilise land better and thus reduce the cost of housing, and pretty much remove the planning system anywhere within 2 miles of a station with a <60 minute service to a major city.
> Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan.
Not just people! Companies, municipalities and other levels of government too. These rate increases mean literally every entity in our over indebted nation is going to feel pain.
Except the consumers driving inflation -- the ones who have little debt and are spending their inflation linked income like there's no tomorrow. The ones we refuse to hit with targetted tax
Forgot about the minimum wage. I'm certainly not opposed to increasing that, but forcing companies to hand out a 10% pay rise at a time when inflation is at record levels seems a little short-sighted.
It probably should have been 5-6% to encourage a real decline in spending power. Not that it makes me happy to say.
The BoC seems to me to have now locked themselves onto a path of finally crushing the Canadian housing bubble. Which comes at an awkward time as Canada is suddenly increasing its population at a record pace. No matter how this plays out, it's not likely going to be a smooth ride.
I don't know much about this area so maybe you can unpack this for me. Are you saying people are getting building permits, but not actually building? Why would that be happening? And what about the market is causing it?
Parent comment is incorrect. No one goes through the costs of design and permitting and planning approvals to do nothing and hope prices go up. You’d wait and land bank and then do it when you were ready to develop.
Developments have been put on hold because interest rates skyrocketed and inflation in construction costs has as well. So original business plans are no longer viable.
Developers are getting permits but then the interest rates have gone up so much, or other market conditions have shifted, such that it is no longer viable to build the building.
The problem is that the system is too rigid and the conditions of project viability are extremely narrow.
No chance this crushes the 'bubble'. Record immigration, developers have greatly reduced housing starts, and people will do anything to keep their mortgage as asset prices continue to rise.
There's no political will at any level (muni, provincial, federal) to build housing, remove zoning, to reduce immigration to reasonable levels, and it's starting to feel hopeless.
Average rent for a 1br in Vancouver is $2250 - an individual following the 30% rule needs to make 90K/year to justify that. The system is broken and we'll continue to hear platitudes from the government, and that goes for both the Libs and the Cons.
Every time I hear the Canadian government responding to this housing crisis... the only thing they do is pass policies that enable people to buy even "more" expensive houses.
For example, their big move last year was to let people sock another $8000 away to put towards a house tax free while at the same time increasing immigration to eye popping levels. Another thing to note with Canadian immigrant strategies, these numbers often don't include "temporary" students and others which use the program "on mass" to immigrate into Canada if they didn't succeed through other means.
An immigration explosion is typically excellent but it must be matched with housing development growth and Canada is literally doing the opposite... mind boggling.
What should the Canadian federal government do? Housing is a provincial and municipal responsibility. They're the ones that set zoning and housing regulations.
For example one of the biggest costs on apartment builders that dissuades them from building apartments is the HST. Developers are constantly saying this makes their projects unviable and kills them.
The Federal government could waive the HST tomorrow and massively incentivize apartment development.
The Liberals even promised to do this in past campaigns, then reneged on this.
In the past when apartments were being built rapidly it was aided by enormous tax expenditure from the federal government.
If it was a condo development being sold, then yes the end buyer of the condo would pay, but if it's a purpose built rental, then the builder has to pay the tax.
> Residential builders sometimes face unexpected GST/HST liability due to the self-supply rules in Canada's Excise Tax Act. In effect, the self-supply rules deem a builder to have sold to itself a residential property at fair market value if the builder constructed or substantially renovated that property and then either rented it out or personally occupied it.
In effect this makes purpose built rental (PBR) dramatically less viable than condo development and a core reason why builders basically stopped building PBR entirely.
Setting aside the discussion around whether PBR or condo is better to build etc, the core point here is while yes, housing is a provincial responsibility, the Federal government's taxation policies have a dramatic impact on the sort of housing that is built in this country.
I don't quite get this argument. I can kind of see it, but isn't the total cost of the property the same whether or not it's sold to an end buyer or purpose built as a rental?
For example, if you have 2 condos that worth $100k, an end buyer pays $105k after GST and a corporation building a rental pays $105k. I don't see how that's unfair unless the corporation is looking for a sneaky way to have the government subsidizing their business.
How would that be fair to me if I was the end buyer purchasing a condo as a rental property? Should I get a rebate for the GST to keep it fair?
That said, I think there should be a total ban on corporate owned residential property. Eventually we'll all be renting from private equity firms if we let the current trends continue.
> I don't see how that's unfair unless the corporation is looking for a sneaky way to have the government subsidizing their business.
It isn’t about fairness or not, it is just an explanation as to why everyone is building condos rather than apartments, which really sucks because instead of renting from a large landlord that has actual experience and staff, you end up renting from some dentist turned real estate “investor” who is magically on vacation when there’s a leak in the unit and doesn’t pick up the phone after 8pm. Clearly there is a place in the market for both types of landlords but the HST structure disincentivizes one type of landlord from existing.
> How would that be fair to me if I was the end buyer purchasing a condo as a rental property? Should I get a rebate for the GST to keep it fair?
This might be one solution, or go the other way and disallow condo developers from claiming the ITCs.
Not going to get into the discussion of PBR vs condo and why you'd want to do either, but I'll elaborate more on how the taxation makes PBR unviable.
The difference between these two scenarios is in the financing, and financing is critical in the entire viability of the project.
In the Purpose Built Rental scenario the builder has to pay lets say 12% for each of these 100k condos in a 125 unit building, which ultimately results in the building costing an additional $1.5M to build. They need to find that money or find financing for that money.
In the condo example the building is $1.5M cheaper to build as they do not need to find that money, they simply sell all the condos and the buyer pays.
It's easier to get financing for a smaller amount of money, and so the condo becomes more viable and more likely to be built.
Now 1.5M maybe doesn't sound like a big deal, but from my understanding of the development industry all this really matters and adds up.
We've seen in Canada the entire market for PBR pretty much disappear and be entirely taken over by condos so this is not really any sort of debate. The development industry has talked about this a lot.
The core underlying point is though then that if there is political desire to build more PBR than condos, it's not just a provincial issue, since the fundamental taxation difference is an important part of the underlying incentives that drive people to make different sorts of housing tenure types, and this is a federal issue.
This is just one example. There's all sorts of ability for the federal government to change incentives via taxation.
(in the past one of the biggest reasons why so many apartments were built was all sorts of other capital gains tax benefits around apartment development which no longer exist)
Yep. I didn't read the Wikipedia article, but, AFAIK, there used to be more non-market or co-op housing in Canada where the cost of rent, etc. was tied to the actual costs instead of what the market will bear. That acted as a check on runaway greed since it gave people a good comparable (at least for rent) that was based on fair value rather than maximizing profit.
They could at the very least not import 1M a people a year (many of whom come here to study at diploma mills that result in no real career skills and considerable debt) at a 38M population, and limit corporations and non-citizens from buying property.
It's on the provinces to get rid of zoning and speed up development of new housing starts, but the Feds are pouring gasoline onto a house on fire with no regard for the rest of us. We wouldn't have such a significantly declining birthrate if people could afford to have children of their own in Canada.
AFAICT, that's double counting. IOW, a significant portion of non-permanent residents eventually become permanent residents, and get counted when they become permanent residents.
"We will give any municipality that fills out this form $23,800,042 to build affordable housing; each 2 bedroom apartment must be sold for $123,456 and cannot be sold above $234,568 for the next 15 years."
This is only arguably true because Jean Chretien decided to completely disengage and walk away in 1993 to solve his budget problems.
Prior to this the Federal government was deeply, deeply involved in housing in this country, both literally building social housing and also incentivizing both social, coop and market housing through huge amounts of tax expenditure.
Accordingly there was an enormous amount of apartment development through the 60s/70s when the government was most involved in incentivizing housing, and then as investment was cut down, it eroded all the way to nothing.
There is no single silver bullet to our housing problems, but honestly if we had to look for one, some single thing that had the biggest contribution, it probably would be that 1993 budget.
It's silly to pretend that large-scale homebuilding isn't being done with profits that only incentivise restricted volumes of building. Federal or state building could rectify supply and stabilise prices.
That said, it's decades too late. We're at the top of a tall, steep hill. As soon as enough people start walking away from their mortgaged homes because they can't afford repayments —which will happen with base rates so high— the market will crash.
I think there's a good chance investment firms buy up everything. If people are walking away from their mortgages that means the properties can likely be bought below market rates, especially if they can do bulk or quick deals with banks.
As supply consolidates the market rates will keep going up, so the smart choice for anyone with a huge investment in the market is to just keep buying until they own everything, right? Don't let the market crash. Instead, prop it up until you own so much of it that you effectively make the rules and set the market rates.
Investment firms are already facing massive holes in their books as office space around the world goes unlet and devalues.
In my area we're already seeing people trying (and failing) to sell at reasonable prices. The average mortgage repayments are set to rise by £6kpa. It won't be afforded for long.
Yes, I'm sure someone will clean up, but it won't buoy prices and it'll only make the long term picture worse.
Indeed, it's a terrible situation. If it does not crush the bubble, it will be interesting to see how it plays out. At higher interest rates, shelter becomes an ever increasing component of core CPI growth. There's about another year remaining before this feedback loop makes itself impossible to ignore. Otherwise, non-shelter prices will have to drop quite significantly for inflation to moderate with such pressing increases in rents and mortgage interest. But that would be indicative of a recession, which would put many mortgages in jeopardy. It could also lead to a populist anti-immigrant backlash, which might reverse the only bullish fundamentals for housing.
This would help housing prices but otherwise crush GDP growth. The problem is that there are no good answers now and governments are really bad at choosing from terrible options so they’ll just find a way to kick the can down the road and make it 10x larger, which is why we are in this place to begin with.
> There's no political will at any level (muni, provincial, federal) to build housing, remove zoning, to reduce immigration to reasonable levels, and it's starting to feel hopeless.
Ford seems pretty serious about it in Ontario, freeing up new development land, banning municipalities from holding developers hostage until they pay random art contribution fees and other pet project fees, gutting heritage group powers and other NIMBY bullshit, and granting strong mayor powers. I don’t like the man’s politics generally but I do feel like he is most serious about the housing crisis.
> There's no political will at any level (muni, provincial, federal) to build housing, remove zoning, to reduce immigration
I see at least one level that sure gives the impression they want, and are subsequently demanding, more housing. I'll give you the fact that it's neither Libs nor Cons though.
I don't think it's a bubble. There are no places to buy or to rent. Our major cities simply do not have enough housing. We have to build more, and higher interest rates make that even more difficult.
Saying cities are running out of housing is really just saying that jobs in cities still look attractive at current housing prices. Double current prices and suddenly most of those jobs wouldn’t look attractive which instantly reduces demand for housing until you’re back to current prices.
Interest rates do little to discourage home construction, the limitations are from transportation and zoning issues. Ie: The worse the transportation system the fewer areas are viable to build housing, and the more important existing housing and zoning restrictions in those areas are.
As long as people continue to buy up housing as an investment, without even trying to earn rental income, we’re going to see this crisis continue. Higher interest rates put the squeeze on ordinary Canadians with mortgages but investors are just buying housing with cash. It’s brutal!
That seems unlikely. Investors are, if anything, the most rate-sensitive, both in terms of borrowing costs and opportunity costs (they will move their cash out of housing and into bonds, if the bond yield is higher than what they'll earn on rent and price appreciation). Ordinary residents will buy even at the peak, risking loss, because they need a place to live, but investors don't buy housing because they need it. They can't rely on other investors being the bigger fool, and so in a rising-rate environment they either buy if they can raise rents high enough, or else they will put their cash elsewhere.
> Double current prices and suddenly most of those jobs wouldn’t look attractive which instantly reduces demand for housing until you’re back to current prices.
Sure, but we've already done this several times in our major cities, and it hasn't killed demand.
> Interest rates do little to discourage home construction
“With interest rates remaining high, it continues to be challenging for developers and homebuilders to get projects started,” he said in a press release.
That article is from April and housing starts dropped further.
In the 1970's Canada had a lot of purpose built rental stock subsidized by the government. You could find a place to live anywhere. I think there has to be some of that, plus some top-down work on zoning (which is happening in some provinces, overriding municipalities) and then we need to just build and build.
> Sure, but we’ve already done this several times in our major cities, and it hasn’t killed demand.
Not over an afternoon. Housing prices haven’t grown in a vacuum, massive increases in productivity and population over time feed back into peoples ability to pay for things. Beachfront vacation homes have also become vastly more expensive for related reasons, but that obviously gets less press than peoples primary residences.
Most things are priced based on what it costs to create them, other stuff is based on how much people can afford. Urban housing has entered the second category and it’s going to take a lot more than minor interest rate changes to reverse this trend.
Your point about transportation is key. Many of our cities are un-walk-able, un-transit-able, and sometimes even un-drive-able. If we can't easily provide multiple options for getting from A to B in a city, there is little hope of providing viable housing options.
We already have the "must own a car" requirement for most of Canada, but even that's becoming not enough thanks to the fact our roadways are under-developed and the price of gas (and owning a vehicle) is rising rapidly.
Those are some pretty massive road blocks in the way of home ownership for an average person, I can't imagine developers are keen to keep adding to the problem.
The problem with this theory is that almost nobody who lives in these cities is paying current prices for a home. A person in Vancouver or Toronto needs a top 1% income to buy a detached house. Almost everyone with a home can only afford it because they bought a long time ago. Almost every city is like this so “just move” isn’t a realistic option. People will continue living here because they either don’t have to care about the price (bought long ago, inheritance, love with family, etc) or because they’re a poor immigrant that’s happy to share a 1 bedroom apartment with 5 strangers for $600 a month
The average Vancouver house dweller makes 44k which is way lower than people in any other home type. People are buying houses with wealth, not income. It doesn’t matter what jobs pay.
Homeowners don’t as a rule directly set prices just as people holding stocks indefinitely don’t set stock prices. However there’s a constant stream of people dying etc which brings such homes onto the market and needs to be offset by people buying in.
Renters are different because they regularly sign a new lease and so very much do care about changes to the prices. Renters leave cities for many reasons, but high rent is a common one especially at retirement.
You'd think the cost on the largest piece of debt a family hasdoubling would have a negative effect, but not in Canada to date, extend and pretend is the name of the game. The government seems set to prevent any reckoning by instructing and monitoring the banks to lessen the impact via the body that regulates them. A week ago the Financial Consumer Agency instructed banks to take steps to assist mortgage holders "The guideline sets out how FCAC expects federally regulated financial institutions to provide tailored support to consumers with mortgages on their principal residence who are experiencing severe financial difficulty."
- negative amortization
- not charging interest on any interest not being covered
- not charging too high of rates on fixed term renewals (not sure how this one works given the cost of capital on a 5yr terms is ~ 5-5.5% -> force the banks to loose money on renewals I guess?)
So maybe the strain will slow and it will shift to non regulated debt like credit cards. It will be harder to borrow for first time buyers as banks pull back. Lots of unintended consequences I'm sure.
I imagine the hope is you can pretend rates are actually not at a 20yr high by forcing the banks to not pass on the costs, and hope they go back down again the old "money is free" days. Problem is the cost of housing staying artificially high and not letting property values comes down is just forcing the housing input to inflation to be high giving the BOC tough choices. The market is seriously fucked up, a reasonable family home in a 2nd tier city is 1M which is a cost (opportunity or real) of 130k / yr (after tax) - so better hope your family income is 200-250k. If you're 20-30 forget about it, borrow money from the bank of mom and dad.
On the plus side making 5% on a savings account is now real money -> the risk free return hasn't been this high for a long time (20 yrs?). Either rates need to come down or asset prices do, but I agree that eventually something has to give.
Prices are going up unchecked. Our food chain is owned by an oligopoly. We have cut our taxes so much that our education and healthcare is severely underfunded. I know none of this is the fault of Bank Of Canada. But they need to step out if their ivory towers and see the families struggling with rent and mortgage payments.
The poor don't pay income tax, their carbon tax rebate is higher than what they pay in carbon taxes, and the GST rebate mostly offsets the GST they pay.
OTOH, they greatly benefit from many programs paid for with taxes.
Despite the high taxation, Canada's public services are quite limited, inefficient, and of rather low quality.
Taxation is also just a small part of the government-imposed economic problems that Canada is facing.
Canada's invasive regulatory overhead and high property/rental costs, for example, make it quite difficult to start and successfully operate small businesses.
Small businesses are what truly pull people out of poverty, both as entrepreneurs and as employees.
Even something as inherently simple as hiring an employee, for example, is far more difficult and costly than it should be in Canada. It often makes more sense for owner-operators to shoulder the burden themselves rather than hiring, even if it means they're over-worked.
We can't forget that some small businesses will eventually grow into larger ones, providing even more employment opportunities, too.
The more that the Canadian government has gotten involved in the Canadian economy, the worse the situation has gotten.
I have started businesses both in California and in Canada, and have not found it more difficult or more expensive to hire in Canada. Can you tell me what additional roadblocks or expenses you have encountered?
So essentially trickle down economics? Help the small business owners and hope they help people in poverty?
Since you can be employed and still be living in poverty, a minimum wage hike would be needed to have a tax cut to actually benefit people living in poverty. Instead of making employers support the welfare system, make employers make sure their own employees aren’t poverty stricken?
I believe the thinking is that reducing tax and regulatory burden promotes entrepreneurship and job creation. Higher rates of employment reduce poverty. Additionally, the government is woefully inefficient at (re)distributing resources (and even worse at picking winners). There is a school of thought that believes many "social services" can be better provided by community led organizations and charities.
No doubt there's no perfect solution and this topic has a lot more nuance to it, but I think that's the jist of it.
The federal government seems completely disengaged in the issue and they've left the entire problem to the bank, whose only tool here is to continue to ratchet up rates, no matter how much pain this is causing homeowners (and eventually renters as investors bail on their properties, thus likely inducing the eviction of their tenants).
Meanwhile in Spain where their government has been quite engaged and busy on the issue, enacting policies to limit severe price increases, they've already reached the 2% inflation target.
What does that even mean? In Canada the issue is that most places have 10 houses for 20 buyers to it ends up being a game of who can pay more as it should be.
Restricting price increases just means buyers are restricted on something else, it does not magically create 10 new houses to meet demand.
We should not be rent-controlling assets, instead you need to take actions that match the number of houses to the number of buyers. You can do that by:
1. Incentivizing builders to build
2. Reducing immigration (at least in Canada)
3. Changing zoning laws to build more densely
1. is not appealing because in Canada there is a strong sentiment against growing the urban sprawl.
2. is not something the government wants to do
3. is what they've been doing for the last 10 years but turns out people don't want an apartment, they want a detached house with a yard and they are willing to put more money on it to meet their expections.
Price control is not any kind of solution to the Canadian housing problem. It would create private listings and all sorts of parallel systems so that people who can pay more can still pay more.
If one of the largest drivers of inflation is housing, why does the government not balance this act with 0% loans to developers/the construction industry? Drive the supply while slowing demand.
That's not necessary - developers are happy to build.
They just need to relax zoning, and also open more areas to constructions. (i.e. make a suburbs, that will over time be subdivided into an Urban area.)
This is the answer. No need to assume a conspiracy among a massive, dispersed group of developers across the country! The issue is zoning and NIMBYism.
Anyone who has followed the development of mid-scale or large-scale residential projects in Canada's major cities will have seen that the construction phase itself is perhaps the easiest and often the quickest part of the process. This is true even for large concrete highrises.
One to three years of construction can easily be eclipsed by the unnecessary, onerous, and very lengthy "planning" processes imposed by government, especially if tribunals, appeals, and other bureaucratic overhead is imposed on a project.
I think it likely has something to do with lobbying by said developers and property holders who don't want interest rates to go up.
Their whole gamble is building big construction projects sold to investors looking to diversify their portfolio by grounding some of their holdings as physical real estate. As a held asset, these investors want their assets to grow in value, or at the very least, remain stable.
If interest rates rise, the sky rocketing prices of real estate slows. This negatively affects the investors asset ratings and their ability to continue to loan against those assets to do even more with their money/assets.
This vested interest is a shared agreement between big investors, large builders, and their subsidiaries. Actually building houses that are affordable to real people has absolutely nothing to do with their game plan.
I’m not arguing for a single family home in Manhattan or Hong Kong. There is plenty of land for single family homes in the suburbs. Needs change as people progress through life.
And the infrastructure to support these "remote" homes is paid for by whom?
Also, if we don't do as you want and instead build high density only and start demolishing the sprawling suburbs then we can have forests a 5 minute walk from everyone... Parks everywhere, nature thriving, while we have to only travel 4 blocks to do everything we need to in life because the density means that Walmart and everything else can and will be in close proximity to Everyone all without the need for a personal vehicle.
See, your demand has serious knock on effects you either didn't consider or view as irrelevant against your personal privileges....
Apparently there's a scarcity of builders and when given a choice, they'll choose the bigger more lucrative contracts? I'm just guessing for that part but what I do know is that trying to find and buy a stereo typical "starter home" as a first time buyer is nigh impossible. Newer stock in that category just doesn't exist, it's all from the 60s and 70s. New housing is either shoebox "luxury" condos or unaffordable McMansions.
Which is why we need to prevent the building of those more lucrative high margin homes.
It's right there in thier description, they aren't providing a good value for the dollar and letting that happen at the expense of any housing for magnitudes more people is a clearly untenable policy.
I think this won't help because money for developers is not what holding things back. Developers in Canada seem to have plenty of money, but they are restricted by approvals and construction capacity in building more. Developers will always charge market rate (which is now like 2000$/sqft) for their new buildings since they want to maximize their profits. Their cost do not play any role in what they are charging.
Maybe it would help if these loans would help to get new developers and builders into the game. But if those need to hire the same builders, it's questionable whether there is more build capacity in the end.
> Their cost do not play any role in what they are charging.
This statement is absurd. By your logic they could charge $20,000/sf but aren’t because of… restraint? No, turns out there are market forces in real estate just like every industry and the more profit there is, the more competitors turn out to play, driving the profit down to a market level.
> why does the government not balance this act with 0% loans to developers
CMHC does exactly this if you are willing to build affordable housing. The issue is that construction costs have also gone nuts throughout COVID and a lot of development business plans have been destroyed at these new construction prices.
Canada homeowners have a lot of adjustable-rate mortgages, right? How are these rate increases playing out? Is there any data on the percentage of homeowners who are past the fixed-rate initial period and are therefore immediately seeing the rate hikes reflected in their bills?
The article discusses this and says that the average homeowner is paying $1200 extra per year now.
Oddly the average mortgage payment, according to that article, is around $4300. Lot of expensive homes in Canada, I guess. (I only pay $3200 in New York City, at 6.5%!)
To be fair, that's about the same with the exchange rate, but the fact that the average mortgage cost across all of Canada is the same as one of the most expensive US markets is telling.
I'm looking for different data than what the article presents. The article mentions what a hypothetical owner that is past the fixed-rate grace period pays. I am looking for the percentage of homeowners overall that actually falls into that bucket that feels these rate hikes immediately.
For example, if (hypothetically) 100% of the adjustable rate mortgages were opened last year, and they all had a 7-year fixed-rate grace period, then the rate hike doesn't actually affect any of them right now.
I am not sure but another reason could be the mortgage duration. In US 30-year is very common, according to my quick google search in Canada most mortgages are limited to a 25-year amortization period.
25 year amortization period, but even most "fixed rate" mortgages are only fixed for a 5 year term, at which point you have to renew at the prevailing rate.
You can get a 10 year fixed rate but you'll pay a substantially higher interest.
So many people with a fixed rate are still forced to renew for another term at a much higher rate right now.
But as you mentioned, the shorter total duration probably explains part of the differential as well. That, and very high property prices in many parts of the country.
The fear (now largely realized) is that increasing interest rates mechanistically drive up inflation (because of how the price index is calculated in Canada), which the Bank of Canada combats by...raising interest rates.
Includes a good discussion of just how potentially screwed the housing market is.
(Also an interesting example of a market where "prices expand to fill the available money", which I have a hunch is a good indicator of a supply-constrained market).
Real estate in Montreal is strikingly affordable given the build quality and location. I'm not sure I'll every quite understand it relative to residential real estate in New York or Austin.
It's insane that for a paltry $400k USD in Montreal you can buy a luxury 2br condo.
Although, with all the talks of interest rates... does Canada have a similar policy for mortgages where there is not true concept of a "fixed rate" mortgage for a term longer than five years? I was stunned to learn that in New Zealand mortgages aren't backed by the gov in most cases so mortgage rates are assessed every 3-5 years - which is insane.
Recently it's become illegal to provide civil services in any language but French; this includes services that are government funded, like public libraries. There are four exceptions to this rule: you're First-Nations or Inuit, you arrived less than six months ago, you can provide proof you used English exclusively with the government before 2021, you can provide proof you are a student at an English-speaking school. There's also the warrantless search-and-siezure powers held by the Office Quebecois de la Langue Francaise (OQLF) where they can walk into any business unannounced and inspect your internal correspondence to make sure your employees are only using French. Employers who wish to hire an employee whose primary language isn't French must submit a written explanation to the OQLF as to why. Any companies with more than 25 employees can be asked by the OQLF to submit scheduled reports on how they are protecting use of French in their workplaces.
Ask wikipedia about "Pastagate"; things have become more severe since.
Wow, that's insane. Does this kind of search and seizure also apply to private residences?
Also, curious how this would impede every day life for someone who spoke passable french but worked remote for a US company? In my estimation they can't ban AI or tools that let you visually translate automatically?
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[ 2.7 ms ] story [ 185 ms ] threadThe fund and spend, but not too much growth conflict throws me for a loop.
This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.
The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so.
Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party.
The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.
On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at)
This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank.
Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case.
I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money.
[0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting
[1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.
Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
Short term inflation (usually horizon of less than 18 months) can significantly increase due to demand outstripping supply, absolutely. Market efficiency though, should cause rapid normalization and eventually prices will fall due to competition, at least in a healthy functioning market economy (that's another debate).
That said, I'm considering what drives long term inflation, which extends beyond an 18 month horizon. We're approaching year 3 of dramatically increasing inflation across the board, and one of the only mechanisms we have at that point is driving up the cost of new money and allowing that to ripple across the economy. So much of our economic system is centrally based around borrowing, whether its cars, homes, business expansion etc. These decisions are in part, driven by cost. When the cost of borrowing is lower, its easier to spend higher sums and drive long term inflation. It also lends people to seek greater and greater returns with "cheap money", driving these boom bust cycles.
My general argument is long term inflation is driven by cheap money, and short term inflation that may be caused by government assistance is just that - short term, and measurable, and should, in a functioning market, normalize itself away.
tl;dr, demand side inflation naturally curbs since high demand outstripping supply will natural raise prices to an equilibrium, and bring them back down as it cools off, supply side inflation is more opaque in reality, esp. when it comes to controlling borrowing costs (IE, creating new money)
> Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case.
This is also probably why you're getting down voted - it's just wrong
1. taxation, either explicit or implicit through interest rate manipulation, doesn't impact monetary supply at the scale we're talking about here. It impacts the cost of, and therefore the availability of capital.
2. cash assistance to the poor isn't a simple "take $100 from Peter and give it to Paul" transaction. It transforms capital (what taxes impact) into money. This is a weird distinction, but capital isn't money. Think of it as two separate streams - there's a fictionalized capital stream of stock markets etc, and a "real world" money stream that interacts with good and services.
3. Cash assistance to the poor directly drives inflation because the demand for goods is decoupled from reality. By giving cash to the poor, you generate increased demand for the same amount of goods and services. This is econ 101 - demand goes up, prices go up. Because the monetary supply has been manipulated by injections from capital, this demand is decoupled from the cycles that would tamp it down.
Let me repeat that: a sudden increase in demand, coupled with more money in the system, decouples prices from the systems that keep them in place and drives inflation.
If you'd like an object lesson in this, I'd refer you to the past 3 years of experimentation with wealth transfers in the US, and the current inflation as a result of that.
Edit to add - I make no moral statements here. I think that cash assistance to the poor _is_ generally the least bad option of government assistance; however, we should be clear eyed about the costs of these actions, and not hand wave them away, only to be shocked, shocked, shocked, when those costs come due.
Cash assistance to the poor / middle class is more murky. While yes, short term inflation in part was driven by the broad relief payments[3], it is sustained by cheap money[4].
My argument is centrally that cash assistance to the poor and middle class, broadly, won't sustain inflation as prices rise and demand normalizes, as an efficient market should do. The distortion on that market happens with a combination of low interests, which drives cheap capital creation, which distorts natural price normalization, and fuels riskier investments, which are all observable economic cycles.
My conclusion, based on what I understand and evidence there in, is that cash assistance, especially in limited one shot capacity, is not going to sustain inflation at the pace we've been seeing it most broadly. One particular note is PPP loans (which were largely forgiven) + "cheap money" is a big driver in being able to sustain higher prices via "buffing" the balance sheets of businesses. If I can sustain demand loss at a higher price because my operating costs dropped significantly due to cheap (or in some cases "free") money, you've just distorted the market.
In a healthy environment, high prices should naturally have lead to lower demand, which would kick off the deflation cycle, which in a certain band, is healthy for the economy as a whole.
This is why there's arguments over whether interests rising more dramatically is the "right tool for the job".
To be honest, I'm not sure our understanding differs that much on this aspect, only in as so far as I am less critical of direct cash assistance to the poor / middle class than the assistance given to wealthy / corporations (in, for instance, form of PPP loans). I also don't think that cash assistance is the real long term driver of inflation at this stage.
I'd also like to note, I wasn't talking about pandemic relief per se, I was more talking about general cash assistance that you would typically see in welfare programs, which is provided via taxation, usually.
[0]: https://home.treasury.gov/policy-issues/coronavirus/assistan...
[1]: https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-pr...
[2]: https://www.stlouisfed.org/en/publications/regional-economis...
[3]: https://www.federalreserve.gov/econres/notes/feds-notes/fisc...
[4]: https://www.imf.org/en/News/Articles/2022/07/11/CF-US-Econom...
The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis.
Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages.
(now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)
Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion.
In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist.
In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government.
But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt.
I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing.
It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.
However we see both minimum wage and pensions increasing 10%+. Now sure those on minimum wage will spend it on something frivolous like food, but those on indexed linked pensions, who already pay far less tax per pound received than a working person, have even more money to spend.
Roll NI into Income tax, it will raise money spent and take it from those who actually have money to spare and are thus driving inflation by created demand where supply can't keep up. Throw in a land value tax to encourage people to utilise land better and thus reduce the cost of housing, and pretty much remove the planning system anywhere within 2 miles of a station with a <60 minute service to a major city.
Not just people! Companies, municipalities and other levels of government too. These rate increases mean literally every entity in our over indebted nation is going to feel pain.
It probably should have been 5-6% to encourage a real decline in spending power. Not that it makes me happy to say.
Is this like domain names?
Developments have been put on hold because interest rates skyrocketed and inflation in construction costs has as well. So original business plans are no longer viable.
The problem is that the system is too rigid and the conditions of project viability are extremely narrow.
There's no political will at any level (muni, provincial, federal) to build housing, remove zoning, to reduce immigration to reasonable levels, and it's starting to feel hopeless.
Average rent for a 1br in Vancouver is $2250 - an individual following the 30% rule needs to make 90K/year to justify that. The system is broken and we'll continue to hear platitudes from the government, and that goes for both the Libs and the Cons.
For example, their big move last year was to let people sock another $8000 away to put towards a house tax free while at the same time increasing immigration to eye popping levels. Another thing to note with Canadian immigrant strategies, these numbers often don't include "temporary" students and others which use the program "on mass" to immigrate into Canada if they didn't succeed through other means.
An immigration explosion is typically excellent but it must be matched with housing development growth and Canada is literally doing the opposite... mind boggling.
They also control inflows of money from outside investment.
For example one of the biggest costs on apartment builders that dissuades them from building apartments is the HST. Developers are constantly saying this makes their projects unviable and kills them.
The Federal government could waive the HST tomorrow and massively incentivize apartment development.
The Liberals even promised to do this in past campaigns, then reneged on this.
In the past when apartments were being built rapidly it was aided by enormous tax expenditure from the federal government.
> Residential builders sometimes face unexpected GST/HST liability due to the self-supply rules in Canada's Excise Tax Act. In effect, the self-supply rules deem a builder to have sold to itself a residential property at fair market value if the builder constructed or substantially renovated that property and then either rented it out or personally occupied it.
In effect this makes purpose built rental (PBR) dramatically less viable than condo development and a core reason why builders basically stopped building PBR entirely.
Setting aside the discussion around whether PBR or condo is better to build etc, the core point here is while yes, housing is a provincial responsibility, the Federal government's taxation policies have a dramatic impact on the sort of housing that is built in this country.
For example, if you have 2 condos that worth $100k, an end buyer pays $105k after GST and a corporation building a rental pays $105k. I don't see how that's unfair unless the corporation is looking for a sneaky way to have the government subsidizing their business.
How would that be fair to me if I was the end buyer purchasing a condo as a rental property? Should I get a rebate for the GST to keep it fair?
That said, I think there should be a total ban on corporate owned residential property. Eventually we'll all be renting from private equity firms if we let the current trends continue.
It isn’t about fairness or not, it is just an explanation as to why everyone is building condos rather than apartments, which really sucks because instead of renting from a large landlord that has actual experience and staff, you end up renting from some dentist turned real estate “investor” who is magically on vacation when there’s a leak in the unit and doesn’t pick up the phone after 8pm. Clearly there is a place in the market for both types of landlords but the HST structure disincentivizes one type of landlord from existing.
> How would that be fair to me if I was the end buyer purchasing a condo as a rental property? Should I get a rebate for the GST to keep it fair?
This might be one solution, or go the other way and disallow condo developers from claiming the ITCs.
The difference between these two scenarios is in the financing, and financing is critical in the entire viability of the project.
In the Purpose Built Rental scenario the builder has to pay lets say 12% for each of these 100k condos in a 125 unit building, which ultimately results in the building costing an additional $1.5M to build. They need to find that money or find financing for that money.
In the condo example the building is $1.5M cheaper to build as they do not need to find that money, they simply sell all the condos and the buyer pays.
It's easier to get financing for a smaller amount of money, and so the condo becomes more viable and more likely to be built.
Now 1.5M maybe doesn't sound like a big deal, but from my understanding of the development industry all this really matters and adds up.
We've seen in Canada the entire market for PBR pretty much disappear and be entirely taken over by condos so this is not really any sort of debate. The development industry has talked about this a lot.
The core underlying point is though then that if there is political desire to build more PBR than condos, it's not just a provincial issue, since the fundamental taxation difference is an important part of the underlying incentives that drive people to make different sorts of housing tenure types, and this is a federal issue.
This is just one example. There's all sorts of ability for the federal government to change incentives via taxation.
(in the past one of the biggest reasons why so many apartments were built was all sorts of other capital gains tax benefits around apartment development which no longer exist)
It's on the provinces to get rid of zoning and speed up development of new housing starts, but the Feds are pouring gasoline onto a house on fire with no regard for the rest of us. We wouldn't have such a significantly declining birthrate if people could afford to have children of their own in Canada.
I think it's relevant to include them here because even if they're not staying permanently, they still need places to live.
Prior to this the Federal government was deeply, deeply involved in housing in this country, both literally building social housing and also incentivizing both social, coop and market housing through huge amounts of tax expenditure.
Accordingly there was an enormous amount of apartment development through the 60s/70s when the government was most involved in incentivizing housing, and then as investment was cut down, it eroded all the way to nothing.
After the feds walked away it got to the point where nothing was being built at all and the country was just coasting. No one built social housing in Nova Scotia for 30 years for example. https://globalnews.ca/news/9784037/ns-public-housing-stagnan...
There is no single silver bullet to our housing problems, but honestly if we had to look for one, some single thing that had the biggest contribution, it probably would be that 1993 budget.
It's silly to pretend that large-scale homebuilding isn't being done with profits that only incentivise restricted volumes of building. Federal or state building could rectify supply and stabilise prices.
That said, it's decades too late. We're at the top of a tall, steep hill. As soon as enough people start walking away from their mortgaged homes because they can't afford repayments —which will happen with base rates so high— the market will crash.
I think there's a good chance investment firms buy up everything. If people are walking away from their mortgages that means the properties can likely be bought below market rates, especially if they can do bulk or quick deals with banks.
As supply consolidates the market rates will keep going up, so the smart choice for anyone with a huge investment in the market is to just keep buying until they own everything, right? Don't let the market crash. Instead, prop it up until you own so much of it that you effectively make the rules and set the market rates.
The IMF says Canada is the highest risk market for this collapse right now too. It's going to be a rocky few years.
https://financialpost.com/news/imf-warns-canada-highest-risk...
In my area we're already seeing people trying (and failing) to sell at reasonable prices. The average mortgage repayments are set to rise by £6kpa. It won't be afforded for long.
Yes, I'm sure someone will clean up, but it won't buoy prices and it'll only make the long term picture worse.
Given the current situation, a reasonable level would involve a negative immigration rate.
The "temporary foreign workers" and the foreign "students" could immediately return home, for example.
https://www.sightline.org/2021/05/27/yes-other-countries-do-...
Ford seems pretty serious about it in Ontario, freeing up new development land, banning municipalities from holding developers hostage until they pay random art contribution fees and other pet project fees, gutting heritage group powers and other NIMBY bullshit, and granting strong mayor powers. I don’t like the man’s politics generally but I do feel like he is most serious about the housing crisis.
I see at least one level that sure gives the impression they want, and are subsequently demanding, more housing. I'll give you the fact that it's neither Libs nor Cons though.
https://www.nsnews.com/bc-news/bc-prepares-to-remove-some-ho...
https://www.timescolonist.com/local-news/province-reveals-10...
Interest rates do little to discourage home construction, the limitations are from transportation and zoning issues. Ie: The worse the transportation system the fewer areas are viable to build housing, and the more important existing housing and zoning restrictions in those areas are.
That seems unlikely. Investors are, if anything, the most rate-sensitive, both in terms of borrowing costs and opportunity costs (they will move their cash out of housing and into bonds, if the bond yield is higher than what they'll earn on rent and price appreciation). Ordinary residents will buy even at the peak, risking loss, because they need a place to live, but investors don't buy housing because they need it. They can't rely on other investors being the bigger fool, and so in a rising-rate environment they either buy if they can raise rents high enough, or else they will put their cash elsewhere.
Sure, but we've already done this several times in our major cities, and it hasn't killed demand.
> Interest rates do little to discourage home construction
https://financialpost.com/real-estate/cmhc-housing-starts-dr...
“With interest rates remaining high, it continues to be challenging for developers and homebuilders to get projects started,” he said in a press release.
That article is from April and housing starts dropped further.
In the 1970's Canada had a lot of purpose built rental stock subsidized by the government. You could find a place to live anywhere. I think there has to be some of that, plus some top-down work on zoning (which is happening in some provinces, overriding municipalities) and then we need to just build and build.
Not over an afternoon. Housing prices haven’t grown in a vacuum, massive increases in productivity and population over time feed back into peoples ability to pay for things. Beachfront vacation homes have also become vastly more expensive for related reasons, but that obviously gets less press than peoples primary residences.
Most things are priced based on what it costs to create them, other stuff is based on how much people can afford. Urban housing has entered the second category and it’s going to take a lot more than minor interest rate changes to reverse this trend.
We already have the "must own a car" requirement for most of Canada, but even that's becoming not enough thanks to the fact our roadways are under-developed and the price of gas (and owning a vehicle) is rising rapidly.
Those are some pretty massive road blocks in the way of home ownership for an average person, I can't imagine developers are keen to keep adding to the problem.
The average Vancouver house dweller makes 44k which is way lower than people in any other home type. People are buying houses with wealth, not income. It doesn’t matter what jobs pay.
Renters are different because they regularly sign a new lease and so very much do care about changes to the prices. Renters leave cities for many reasons, but high rent is a common one especially at retirement.
I'm sure it'll turn out fine!
- negative amortization - not charging interest on any interest not being covered - not charging too high of rates on fixed term renewals (not sure how this one works given the cost of capital on a 5yr terms is ~ 5-5.5% -> force the banks to loose money on renewals I guess?)
So maybe the strain will slow and it will shift to non regulated debt like credit cards. It will be harder to borrow for first time buyers as banks pull back. Lots of unintended consequences I'm sure.
I imagine the hope is you can pretend rates are actually not at a 20yr high by forcing the banks to not pass on the costs, and hope they go back down again the old "money is free" days. Problem is the cost of housing staying artificially high and not letting property values comes down is just forcing the housing input to inflation to be high giving the BOC tough choices. The market is seriously fucked up, a reasonable family home in a 2nd tier city is 1M which is a cost (opportunity or real) of 130k / yr (after tax) - so better hope your family income is 200-250k. If you're 20-30 forget about it, borrow money from the bank of mom and dad.
On the plus side making 5% on a savings account is now real money -> the risk free return hasn't been this high for a long time (20 yrs?). Either rates need to come down or asset prices do, but I agree that eventually something has to give.
Best way to reduce poverty is to cut taxes.
OTOH, they greatly benefit from many programs paid for with taxes.
Cutting taxes helps the rich, not the poor.
How does that work? I would assume making up for lost tax revenue involves cutting public services that people in poverty rely on.
Taxation is also just a small part of the government-imposed economic problems that Canada is facing.
Canada's invasive regulatory overhead and high property/rental costs, for example, make it quite difficult to start and successfully operate small businesses.
Small businesses are what truly pull people out of poverty, both as entrepreneurs and as employees.
Even something as inherently simple as hiring an employee, for example, is far more difficult and costly than it should be in Canada. It often makes more sense for owner-operators to shoulder the burden themselves rather than hiring, even if it means they're over-worked.
We can't forget that some small businesses will eventually grow into larger ones, providing even more employment opportunities, too.
The more that the Canadian government has gotten involved in the Canadian economy, the worse the situation has gotten.
Since you can be employed and still be living in poverty, a minimum wage hike would be needed to have a tax cut to actually benefit people living in poverty. Instead of making employers support the welfare system, make employers make sure their own employees aren’t poverty stricken?
So we should all aspire to be like Florida or Texas Or Lousiana ?
Hey Arkansas has legalized child labor. It is now only a matter of time before they become more prosperous than California .
/s
No doubt there's no perfect solution and this topic has a lot more nuance to it, but I think that's the jist of it.
Meanwhile in Spain where their government has been quite engaged and busy on the issue, enacting policies to limit severe price increases, they've already reached the 2% inflation target.
Another way is possible.
Action doesn't necessarily mean things are good.
But at the moment they've hit 2% without inducing the same financial level of trauma on homeowners.
Seems like a success so far.
Wait and see I guess.
What does that even mean? In Canada the issue is that most places have 10 houses for 20 buyers to it ends up being a game of who can pay more as it should be.
Restricting price increases just means buyers are restricted on something else, it does not magically create 10 new houses to meet demand.
We should not be rent-controlling assets, instead you need to take actions that match the number of houses to the number of buyers. You can do that by:
1. Incentivizing builders to build
2. Reducing immigration (at least in Canada)
3. Changing zoning laws to build more densely
1. is not appealing because in Canada there is a strong sentiment against growing the urban sprawl.
2. is not something the government wants to do
3. is what they've been doing for the last 10 years but turns out people don't want an apartment, they want a detached house with a yard and they are willing to put more money on it to meet their expections.
Price control is not any kind of solution to the Canadian housing problem. It would create private listings and all sorts of parallel systems so that people who can pay more can still pay more.
Spain has been more aggressive than Canada in enacting policies that put a lid on prices.
They've intervened to limit rent increases (BC also did this), and limit gas and home heating prices.
More discussion here https://medium.com/@monetarypolicyinstitute/fiscal-policy-is...
Some of these things have been similarly done by some Canadian provinces. We haven't seen the Feds engaged on this issue in the same way though.
Toronto for example largely doesn't have "middle" zoning, its either single-family or condo towers. Similarly for Vancouver.
No surprise, Vancouver/Toronto are the worst hit compared to Montreal or Ottawa, which has a spectrum of density (rather than a bipolar distribution).
Moreover, even within the SFH, there's a huge spectrum of density between something like Atherton, CA and a rowhouse district in Philly.
They just need to relax zoning, and also open more areas to constructions. (i.e. make a suburbs, that will over time be subdivided into an Urban area.)
One to three years of construction can easily be eclipsed by the unnecessary, onerous, and very lengthy "planning" processes imposed by government, especially if tribunals, appeals, and other bureaucratic overhead is imposed on a project.
* that and ouright corruption.
Their whole gamble is building big construction projects sold to investors looking to diversify their portfolio by grounding some of their holdings as physical real estate. As a held asset, these investors want their assets to grow in value, or at the very least, remain stable.
If interest rates rise, the sky rocketing prices of real estate slows. This negatively affects the investors asset ratings and their ability to continue to loan against those assets to do even more with their money/assets.
This vested interest is a shared agreement between big investors, large builders, and their subsidiaries. Actually building houses that are affordable to real people has absolutely nothing to do with their game plan.
Way too many ft2, too many valleys in the roofs, too many yards.
We solve the housing crisis with high density, modest housing, not the absurd mcmansions everyone keeps demanding.
No. The needs of society as a whole outweigh the wants of a few excessively privileged persons.
Also, if we don't do as you want and instead build high density only and start demolishing the sprawling suburbs then we can have forests a 5 minute walk from everyone... Parks everywhere, nature thriving, while we have to only travel 4 blocks to do everything we need to in life because the density means that Walmart and everything else can and will be in close proximity to Everyone all without the need for a personal vehicle.
See, your demand has serious knock on effects you either didn't consider or view as irrelevant against your personal privileges....
"May you live in the world as you would have it, so long as you live as the least advantaged."
To me it's a blessing. To the majority it's a curse. In both cases it's a manifestation of our underlying natures and preferences.
What is it to you?
I'm not playing your game.
It's right there in thier description, they aren't providing a good value for the dollar and letting that happen at the expense of any housing for magnitudes more people is a clearly untenable policy.
Specifically, mortgage interest is the largest driver of inflation, accounting for 30% of the growth in CPI as of the May figures.
> why does the government not balance this act
Probably the same reason they pushed the inflation problem off on to the BoC back in the 90s. They don't want to deal with it.
But if the government itself wants to tax or borrow in order to subsidize loans for housing, that's something they can do. But not the central bank.
Maybe it would help if these loans would help to get new developers and builders into the game. But if those need to hire the same builders, it's questionable whether there is more build capacity in the end.
This statement is absurd. By your logic they could charge $20,000/sf but aren’t because of… restraint? No, turns out there are market forces in real estate just like every industry and the more profit there is, the more competitors turn out to play, driving the profit down to a market level.
CMHC does exactly this if you are willing to build affordable housing. The issue is that construction costs have also gone nuts throughout COVID and a lot of development business plans have been destroyed at these new construction prices.
Oddly the average mortgage payment, according to that article, is around $4300. Lot of expensive homes in Canada, I guess. (I only pay $3200 in New York City, at 6.5%!)
For example, if (hypothetically) 100% of the adjustable rate mortgages were opened last year, and they all had a 7-year fixed-rate grace period, then the rate hike doesn't actually affect any of them right now.
You can get a 10 year fixed rate but you'll pay a substantially higher interest.
So many people with a fixed rate are still forced to renew for another term at a much higher rate right now.
But as you mentioned, the shorter total duration probably explains part of the differential as well. That, and very high property prices in many parts of the country.
The people on variable vs fixed change over time but I think on average it is around 70% 5 year fixed, 30% variable rate
There are people whose payments are no longer covering interest, and hence amortization is growing, causing the watchdog to change rules:
https://financialpost.com/real-estate/mortgages/osfi-negativ...
The fear (now largely realized) is that increasing interest rates mechanistically drive up inflation (because of how the price index is calculated in Canada), which the Bank of Canada combats by...raising interest rates.
Includes a good discussion of just how potentially screwed the housing market is.
(Also an interesting example of a market where "prices expand to fill the available money", which I have a hunch is a good indicator of a supply-constrained market).
Housing in Canada has been screwed up for over a decade.
It's insane that for a paltry $400k USD in Montreal you can buy a luxury 2br condo.
Although, with all the talks of interest rates... does Canada have a similar policy for mortgages where there is not true concept of a "fixed rate" mortgage for a term longer than five years? I was stunned to learn that in New Zealand mortgages aren't backed by the gov in most cases so mortgage rates are assessed every 3-5 years - which is insane.
Ask wikipedia about "Pastagate"; things have become more severe since.
Also, curious how this would impede every day life for someone who spoke passable french but worked remote for a US company? In my estimation they can't ban AI or tools that let you visually translate automatically?