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Canada Needs Lower Home Prices & Economic Stability Requires “Pain”: Bank of Canada

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Canada has 99 problems and mortgage debt….more than 2 trillion of them. bank of canada (BoC) Senior Vice Governor Carolyn Rogers today addressed concerns about financial stability. She boiled it down to two major concerns that have been around for a long time but are piling up: household debt and housing. We warned of the possibility, but we need to restore balance to the country’s market.

Canada’s financial stability threatened by house prices and debt

The BoC Senior Vice-Governor focused on two specific areas of financial stability: household debt and house prices. Neither issue is new, they stressed, with central bank reports referring to these issues as far back as 2006. What may have been a small issue in 2006 is now a huge issue. Because housing is draining Canada’s economy.

Rogers explained that before the pandemic, there was great concern about affordability and investor speculation. did.

“In less than two years, home prices have risen by more than 50% in most markets, and housing activity (the number of homes bought and sold) was about 30% higher than pre-pandemic levels,” she said. emphasized.

This is an important point. This is because it was not a period of weak activity that low interest rates were trying to stimulate. Low interest rates stimulated more activity than usual and the market continued to gas with more stimulus.

Increased frontloading rate reduces rate increase rate

Injecting gas when the economy is booming is the easiest way to ensure higher inflation. There was considerable inflation before the stratospheric invasion of Ukraine. The slow movement was exacerbated by the crisis and the need for immediate action.

“We raised interest rates so quickly because history has shown that front-loaded interest rate increases cool the economy quickly and offer the best chance of anchoring inflation expectations. We can avoid potential increases,” she explained.

She didn’t elaborate on this point, but it’s textbook monetary policy. The longer rate hikes are delayed in an attempt to cool excess demand, the greater the risk that interest rate costs will be embedded in inflation. The result is what has been called an “inflation spiral,” a cycle of inflation and attempts to mitigate it that is difficult to break.

“There is still a long way to go to get inflation back on target, but there are some early signs that monetary policy is working. Unfortunately, this adjustment will not be without pain. I am aware of that,” she warned.

Canadian house prices need to fall to restore balance

Canadian homeowners have dealt with this impact, especially on those who have been misled. interest rates will be lower in the long runAlthough not the large percentage of households she noted, more than usual opt for variable rate mortgages. These buyers are now paying significantly higher interest rates than expected, with interest eating up most of the payments. Fixed-rate borrowers will not be immediately affected by rising interest rates, but will face higher costs when they renew. In short, homeowners will soon be paying more.

At the same time, investor demand and excess credit that have helped drive home prices are leading to a toxic market. Going back to her first point, homebuyers were already facing a shortage of affordability on top of home prices rising her 50%. Not just in Toronto or Vancouver, but across the country. Technically, house prices should go down, and surprisingly the BoC says so today.

“We need to lower home prices to rebalance the Canadian housing market and make homeownership more affordable for more Canadians,” said the lieutenant governor. “However, falling home prices can be stressful for recent buyers.

Short-term end-users may experience little pain because they may not leave their positions for years. However, investors with very immediate positions may face immediate liquidity concerns. Especially if you’re in the pre-sale segment and haven’t yet gotten the home you promised to buy.

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