“The economist who received an award for being the first to sound the alarm on the U.S. housing bubble, is warning the same could happen in Canada if we aren’t careful. Dean Baker with the Centre for Economic Policy and Research says housing prices here might collapse if interest rates rise by about two percentage points.” — 570news
According to Ed Wilmot, there is a question mark concerning your nest egg the value of your home. There may be a crack in that egg! The value of Canadian homes has been growing in leaps and bounds averaging some 10 per cent a year here in London [ Ontario]. The bubble may be about to burst. American economist Dean Baker says Canadian house prices are too high and could very easily take a tumble. Baker says there’s no reason why average home prices in Canada should be 50 per cent higher than they are in the U.S. and warns that if interest rates rise by 2 percentage points Canadian housing prices would collapse by 30 per cent. As for his credentials Baker is the economist who warned of the U.S. housing meltdown 5 years before it happened!
That is how the housing market collapsed in the States: the interest rates were low making it easy to borrow and prices went up because of the new demand. Then, interest rates went up and demand decreased and prices fell. The extra increase made it hard for homeowners to make payments and their homes were now worth less than what they paid originally. Are we doing the same thing here in Canada? The price of homes in some areas of this country is staggering. If interest rates are raised will the market value of these homes decrease?
Some basic research will show that in many areas of Canada, house prices have risen faster than both the Consumer Price Index rate of inflation and wages in recent years. It is not possible for this to continue forever unchecked. If wages/disposable incomes do not move up somewhat to accommodate current housing prices, then it is likely there will be at least some moderation in those prices, although don’t expect that less than 25 to 30 percent according to Garth Turner, former politician and economist.
Why is real estate so high in Canada?
One reason is foreign ownership. The Government of Canada allows wealthy citizens from China and other parts of the world to buy up the real estate in Vancouver/Major cities and force average Canadians to move into the hinterland or leave the province altogether. This is happening for years and not a mention of it anywhere. This is a major root of the issue – pricey real estate with no substantial economic wage base.
If we were really in a free market there would be a shortage in the money supply right now since the majority of people are already overextended with debt. Therefore banks wouldn’t have the funds or the willingness to approve mortgages large enough to cover the current price of homes. That would mean that prices would fall dramatically. Those of us who chose to be disciplined savers and avoided debt would be able to buy houses for reasonable prices again. I’m a free-market guy and would welcome that. Would you?
Unfortunately the government hasn’t allowed it to happen. It instead increased its influence by allowing the CMHC to insure more and larger mortgages, and the Bank of Canada, just like the Federal Reserve in the States, has been keeping interest rates artificially low and increasing the money supply to prevent the free-market correction from occurring.
To all of those who are upset about high prices, the left-wing approach (price caps, housing subsidies, etc.) is NOT the answer. The true right-wing approach (leaving the free market correct itself) is. Unfortunately no one besides Ron Paul in the U.S. has had the courage to advocate such a policy.
Is capitalism to blame?
The current system is not true capitalism (more like crony capitalism or socialism, whatever you want to call it). The government (CMHC) is using taxpayer dollars to insure bank loans to what would otherwise be considered under qualified borrowers, all in the name of keeping prices artificially inflated. That’s not capitalism, that’s corporate socialism.
In a true capitalistic society banks would be more conservative with their lending. If not they would go under when the bubble inevitably bursts, and the bankers who authorized the risky loans would end up on the street where they belong. If banks knew that their own money was on the line (ie. not insured by the big government), I guarantee you that they would require a 25% down payment and wouldn’t risk an amortization period longer than 25 years. That was the norm for decades before the big government got involved. We’d be all for that.