Over the course of nearly a decade, the Canadian housing market rocketed upwards in terms of pricing. Although it may not have been intended, many claim the increase is due to the attempted rescuing of global capitalism as of 2008.
Firefighting: The Financial Crisis and Its Lessons, a brand new book published by Ben Bernanke, former chair of the United States Federal Reserve, puts plenty of additional evidence on display.
Most would agree that in 2008, Canadian house pricing was in no need of a boost. However, governments still attempted to withdraw stimulus after an extreme overheating in the real estate market.
According to Bernanke’s book, the 2008 credit crunch led to central banks around the globe cutting interest rates. The goal being to prevent harm should an event similar to the Great Depression occur.
“We helped shape the American and international response to a conflagration that choked off global credit, ravaged global finance, and plunged the American economy into the most damaging recession since the bread lines and shantytowns of the 1930s,”.
Critics are calling the scheme an issue derived from irresponsible and mismanaged lending. Slashing interest rates to near zero, giving hundreds of billion to banks (U.S. dollars), and other similar actions.
Despite the evidence that Bernanke got this right, signs opposing such a notion are still present. Interest rates that are held lower than market demand have created several distortions.
Following the events of 2008, the U.S. housing market was completely collapsed. They absolutely needed the stimulus that was provided by low rates. It’s important to note that this was not the case in Canada and Australia, where housing markets were doing phenomenally.
Canada’s housing market is relative in terms of its independance, and due to this, their housing market was affected. Had the Bank of Canada held rates above four percent while the Feds were holding at approximately zero, the results would be disastrous.
The view from before the incident must have appeared as though the Canadian Market would boom. More construction, as well as more money in the hands of the owners. Unfortunately, that wasn’t the case.
Some locations saw an increase of almost 30 percent in only a year. Houses become essentially unaffordable. Nobody could buy a house, as a figurative monster loomed over the market.
It’s important to note that while these rates of return were shockingly high, foreign buyers took their shot at bidding the market up further, and succeeded. The only way for most Canadians to compete with these foreign buyers was to obtain a mortgage that inevitably ravaged their overall income.
During this time, Stephen Poloz, governor of the Bank of Canada following Mark Carney, was up to his ears with concern. This housing bubble seemed like it was about to burst, and splash all over the rest of Canada.
It’s mere common knowledge that Poloz’s hands are tied behind his back. Not much he can do but remain on path with U.S. interest rates.
The Bank of Canada has been using macroprudential tools in order to keep interest rates low and stimulation high. In order for this stimulation to remain contained, the use of mortgage stress tests has become vital.
Mortgage stress tests have been shown to accomplish their goal many times over, however, they tend to leave home owners moving towards other sources of funding. Also, mortgages themselves are on the decline.
Perhaps all that’s needed is the proper dose of stimulus. No need for a repeat of 2008.