Tuesday, April 17, 2012

Housing Market Hypocrisy

Yesterday brought new house price numbers showing that the Canadian housing market has not, as yet, fallen off a cliff.  Prices are down a little in Vancouver while still rising in Toronto.  The coverage was accompanied by the standard doom and gloom about a catastrophic housing bubble.  The Globe ran an interview with a blogger on the front page of their Focus section on the weekend promising fire and brimstone for Canadian homes.  Maclean's used one of its sensationalist cover stories to warn of impending catastrophe in house prices.  Leading the fire and brimstone brigade is the Governor of the Bank of Canada, Mark Carney and the Minister of Finance, Jim Flaherty.  Whether or not there is a bubble in the Canadian housing market is a discussion which, while I could discuss at length, I won't.  My personal view is that prices may be a little high but there's a lot of non-bubble contributing factors.  One of the more bubble-like factors, however, is the ridiculously low interest rates we are currently enjoying in Canada.  This is where the hypocrisy comes in.  The Governor of the Bank of Canada and his political master (albeit at a fairly long arm's length) the Minister of Finance, have decided that it is in the country's national interest to have interest rates at this level.  They have absolutely no business criticizing Canadians for taking advantage of the low rates.

Mr. Carney doesn't set interest rates for fun, he does it to try to keep the economy growing in a nice low-inflation environment.  That's his job.  Interest rates are a great way to manage an economy's growth because they have profound on how actors within the economy act.  The reason that you lower interest rates to absurdly low levels, and the reason that you keep interest rates at absurdly low levels is because you want people to borrow.  In fact, you want people to borrow in a way that they wouldn't if interest rates were higher.  That's the whole point of having low interest rates.  Now, admittedly, Mr. Carney really wants businesses to borrow money to spend on equipment more than he wants Joe and Jill Canuck to buy a house but you can't get one without the other.  If you sustain a low interest rate environment, more and more people will take you up on the offer of cheap money and yes, this may cause home prices to go higher than they would in normal circumstances.  This is basic economics.  Mark Carney is a very smart man and a pretty darn good economist.  He knows that reasons 1, 2 and 3 that there may be a bubble in the Canadian housing market is the ridiculously low interest rates that he sets.  It's absolute hypocrisy for him and Mr. Flaherty (who has to be on board with Mr. Carney's plan) to criticize Canadians for doing exactly what they told Canadians to do by lowering interest rates.  If Mr. Carney and Mr. Flaherty were really worried about the housing bubble, they'd raise interest rates.  If they aren't worried enough to do that, they need to stop preaching doom and gloom.  It won't make them less responsible if the doom and gloom actually comes.

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