Normalize Interest Rates and Stop Pretending to Do Something: CMHC to Review Down Payments on Investment Properties as Part of Federal Strategy to Tackle Housing Risks – January 17, 2022
When interest rates were normal, there was one simple problem regarding housing in Canada: people couldn’t afford one—not because they couldn’t afford the down payment, but because people for the most part didn’t like the mortgage rates.
Building condos in the past was also difficult because the government wasn’t as involved in housing as it is now, yet here we are 23 years later and housing problems in Canada are worse now than they were in the 1990s—and the solutions we keep hearing about are MORE GOVERNMENT?
The new normal is that interest rates can’t be normalized because of “INSERT YOUR REASON HERE,” and therefore we just have to deal with the misallocation of resources. More and more Canadians are pointing the blame at foreign homebuyers, but why are foreign homebuyers purchasing real estate in Canada in the first place? ZIRP (Zero Percent Interest Rate Policies).
When interest rates fluctuate and the government is unwilling to pay the mortgages of people during a pandemic, housing becomes a MARKETPLACE again. The modern housing monopoly is not a marketplace; it’s a government-inflationary monopoly in which you’d be wise to buy now or pay a higher price later.
So that’s what people do, and this of course leads to DOWN PAYMENT problems. Just like any business, businesspeople are looking for capital appreciation and cash flow.
Because the CMHC (Canada Mortgage and Housing Corporation) exists to keep housing prices propped up, investors see Canadian real estate as the safest bet to make, so they keep making that bet—and they’re often borrowing money to do it.
Canada, compared to mainland China as an example, is a great investment, but many of these foreign real estate investors don’t need CMHC. CMHC merely helps these foreign investors avoid capital-appreciation losses. Now, even if the foreign investor doesn’t know why the Canadian housing market continues to rise, the bottom line is that it’s rising—and why not ride the wave?
What pricks the housing market bubble in Canada? Forced rate hikes—which might not prick the bubble but may introduce more exotic mortgages, like 100-year amortization or more interest-only mortgages, which already exist in Japan. The problem with raising rates in this modern era of government involvement in everything is that the cost of living will most likely continue to rise as interest rates rise.
The government has been supporting the economy, and therefore shortages are becoming a problem. Via government regulations, raising rates isn’t going to make the economy more efficient—it only equates to making government debt-servicing more expensive. Do you see where I’m going with this? If you don’t, I’m claiming that we’re heading for recession, depression, and potentially austerity measures.
Obviously, it doesn’t look like that will happen now, but once people comprehend that these controlled interest rate hikes aren’t going to help the economy without shrinking government, I expect a reversal. And this reversal in rate hikes, I expect to lead to rampant inflation—which equates to a recession, because paying more money for fewer goods and services is an economic downturn.
Interesting times ahead.
