Curing (Housing) Cancer with Cigarettes

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Came across this news story today on the impossible virility of Canada’s housing market for July 2009 – yes, that’s right: we read on one side of the paper that it is the worst recession in 50+ years, and on the other that housing sales and prices are at an all time high.  Having some vague background in finance and economics, I do understand that this is mainly a product of the near zero interest rates (the cigarettes) that the Bank of Canada is trying to cure the perceived cancer (housing bubble deflation) with.  My concern, however, is with the total lack of socio-economic context that this “save the housing market at all costs policy” has been implemented; not a ringing endorsement in my books for the virtues of an independent central bank.  A few things to consider: one, having housing prices that are at all time highs relative to median incomes is not a good thing; two: current 5-year interest rates are at less than half (4%) their 30 year average (~10%); and finally, if we can learn anything from our American and British cousins, prolonging housing bubbles just creates a biggest disaster down the road.  In a nutshell: free money is bad, because people make silly investments with it – like all those young couples “winning” bidding wars for their dream downtown Toronto semi at $750,000 ($150,000 over the asking price).  The current market isn’t quite as frothy here in Calgary, but most of the gains from 2002 to 2007 have been held onto, and a nondescript bunalow in a nondescript inner city neighbourhood will still set you back $500,000 or more.

Because I have been involved a little in the issue of affordable home ownership from a policy perspective, housing markets that cannot offer diverse entry points that include the statistical middle class are not really a good thing for a local economy, either socially or for growth.  Calgary has above average wages, but these do not nearly compensate for the difference in housing costs with, say, Winnipeg or Saint John.  People aren’t stupid; they won’t relocate for a bigger pay check if it does not change their material standard of living (Toronto may be a little different in that it offers many of the intangibles of big city living).  Interestingly, these latter cities appear to be avoiding the recession altogether, as the cost of living and doing business is competitive when everyone is looking to reduce costs.

While Bank of Canada chief Mark Carney certainly does not look to me for advice (doh!), if I were him, I would increase interest rates from these crazy levels (Australia maintained a reasonable 3% bank rate, and their economy is doing better than most).  Housing prices are too high in this country (now about 80% higher than the US median price), and should not be going higher when median incomes are falling.  This is a gamble too far, and relatively lower housing prices will benefit far more people in the long run than the current housing “lottery” winners who bought in up and coming neighbourhoods ten years ago (although talking to these people sounds eerily like those Nasdaq boosters in the spring of 2000…).

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