Don’t Blame the Bank of Canada for the Housing Crisis
One of the things the pandemic has shown us is that in times of crisis, people often look for others to blame.
This has been a long-established fact in the social sciences. Anthropologist Mary Douglas wrote about how human societies respond to a crisis by demanding certainty of consequences and action where none exists.
For example, as both Ontario and Alberta saw a dramatic rise in COVID-19 cases and hospitalizations during the third and fourth wave of the pandemic, both Doug Ford and Jason Kenney saw their poll numbers fall.
Another example, earlier in the pandemic when Canada lagged behind many other countries in vaccinations, many people began to blame Justin Trudeau for the failure to procure the vaccines
Douglas’s insight can help us understand why many Canadians have been looking for the people and institutions at fault for the housing crisis.
After a small cooldown over the summer, Canada’s housing market continues to get even hotter.
The housing market has caused growing frustration as many people are unable to keep up with the rising costs of housing in Canada’s major cities or are unable to save enough for a down payment on a house in a small town or rural area.
The housing crisis has gotten plenty of media coverage and was one of the central issues of the recent election, but as prices continue to rise, Canadians have been left wondering why housing costs are skyrocketing and who is to blame.
Despite the many complex factors affecting Canada’s housing market, many columnists, online posters, and, most notably, Pierre Poilievre has focused on the actions taken by the Bank of Canada and cast the central bank as the villain at the heart of the housing crisis.
According to Poilievre, by massively expanding the central bank’s balance sheet and maintaining low-interest rates throughout the pandemic and recovery, the Bank of Canada allows lenders to pass those lower rates on to consumers in the form of low mortgage rates, making it easier for people to borrow more money to buy a more expensive home.
On this point, Poilievre is correct. Even Tiff Macklem, Governor of the Bank of Canada, has admitted to seeing worrying signs that some Canadians are taking on too much debt to buy into the housing market.
Poilievre goes even further arguing that the Bank of Canada’s actions is widening inequality in the Canadian economy. When the Bank of Canada slashed interest rates at the start of the pandemic, the housing market started to take off. According to CREA, during the pandemic house prices have risen from under $600,000 to over $750,000. The rising prices have two effects: on one hand, homeowners have seen gains in wealth as their most valuable asset appreciates at higher than expected rates, and on the other hand, renters have seen their cost of living rise as rent also increases.
However, Poilievre’s conclusion that the Bank of Canada is to blame for widening inequality by inflating house prices is shortsighted and misguided. Poilievre and others should be wary of blaming the Bank of Canada for the housing crisis for a few reasons.
First, the prospect of raising interest rates and pulling back monetary support to try to rein in the housing market specifically risks kneecapping the overall economy as it recovers from the economic fallout from the pandemic.
Although the labour market has rebounded back to pre-pandemic levels of employment, because of population growth there are still about 389,000 people who are struggling with long-term unemployment, which is over double the number of long-term unemployed people before the pandemic.
In the recovery of the Great Recession, tight monetary policy from the Federal Reserve contributed to the slow recovery and left millions of Americans left in long-term unemployment. By maintaining low interest rates, the Bank of Canada hopes to generate increased business investment that could bring people back into the labour market.
Furthermore, while household finances are “in good shape,” according to TD economist Ksenia Bushmeneva, they remain dependent on low-interest rates as well as rising real estate and equity market values.
In a recent Q&A with economist Trevor Tombe, Line editor Matt Gurney noted that his friend who recently bought a house said that she would lose her house when asked what would happen if interest rates rose to 5 or 6%. Many people are in the same situation, and if rates are raised too hastily it will prolong the economic recovery.
Second, home-buying boosts consumer spending across many sectors.
When buying homes, people also often purchase large and expensive appliances like washing machines and refrigerators as well as many other lower-priced goods like drapes, utensils, and all kinds of things.
The financial instability caused by the pandemic triggered a massive increase in the household savings rate from 1.3% of disposable income in 2019 to 14.9% in 2020. By encouraging home buying and maintaining low interest rates, the Bank of Canada hopes to stimulate spending throughout many sectors of the economy which is key for boosting employment and lifting the entire economy.
Third, low-interest rates are not the only factor that has stoked demand in the housing market.
Another factor is demographics. With millennials having become Canada’s largest generation, it’s not surprising that, as people reach the age when people generally want and can afford to buy a home, there would be a sharp increase in demand.
Another factor is fiscal policies that make it easier for prospective homebuyers to provide tax credits and subsidies to homeowners. According to a report by Frank Clayton, the federal government spent $18.2 billion in tax expenditures to homeowners in 2017.
Most importantly, a shortage of new and existing homes for sale in the face of surging demand have combined to cause home prices to skyrocket.
A report from Scotiabank found that Canada only has 424 housing units per 1000 residents, the lowest number of housing units per 1,000 residents of any G7 country. Many of the other G7 countries have also seen home prices rise since the pandemic, but Canada has seen the largest home price increase. This is not just a simple correlation. According to the author of the report, Jean-François Perrault, the rising prices in Canadian housing markets, “primarily reflects a chronic insufficiency of home supply.”
In summary, interest rates are a blunt tool of monetary policy that impacts the entire economy, not just housing, and a less expansionary monetary policy would risk harming the economic recovery from the pandemic.
There are plenty of parties who deserve blame for the housing crisis: NIMBYs who attend planning consultations on local developments and vote down; municipal councillors who cater to them; provincial governments that have failed to recognize the issue and force municipalities to build more housing; and the federal government who continue to give tax breaks and subsidies to homeowners and fail to make investments in social housing and provide assistance to renters.
Be sure, the Bank of Canada is not who we should be getting mad at.
