I&J wrote:
The gov't is actually in a catch 22 situation. Interest rates should be rising but you can imagine what damage it would inflict on the economy in general. Mortgages on housing, car loans, HELOCS and other interest sensitive consumer transactions would be negatively affected. Our economy is not strong enough to sustain such increased costs that could not be absorbed by wage increases such as was the of 10% or more wage gains that was seen in the '70s or '80s. So the traditional use of increasing interest rates to slow down a raging housing market is no longer an option unless one wants to further slow down an economy that has not recovered from the abyss of 2008. So low interest rates could be around forever and housing prices would keep rising. There is a difference in marketing techniques between the US and Canada which is probably another reason why house pricing is kept low. In the US many house builders build on spec ie unsold inventory. So in an economic downturn, it is the builder who absorbs the loss of market value. In Canada, ever since the housing bubble in the '80s, builders only build homes once they are sold, so the market is not affected as much by unsold builder inventories.
The government is powerless against the next real estate crash. Well, almost powerless. But pretty powerless. Interest rates are controlled by the global economy, not any one country. Currency values, credit ratings, world politics etc. all control interest rates. If Canada looks like a safe haven to put debt, interest rates are low (lots of demand of investment), but if Canada doesn't look like a safe haven (look at Ontario and their credit downgrade and defect), interest rates go up (as people want more return on their investments to counter the risk). Basically, if the world investors dictate our interest rates go up, they go up.
Now, the government fiddles and muddles by doing things like bond swaps and overnight lending rate adjustments to try to counter this. That is what the US has been doing for QE for years now.. but they are borrowing from the future to fix today. Regardless, Canada maneuvered through the last financial crisis easily because they manipulated the ability for home owners to keep/buy houses by raising the amortization limits, reducing down payment requirements, and reducing the overnight lending rate to 1%. The net effect is (in a supply/demand scenario), supply remained the same but demand went through the roof as all of a sudden a higher percentage of Canadians could qualify and afford a home. The end goal was to use these measures to float the market until the world rebounded and they could slowly crank back the tools (dropping amortization, raising minimum payments, raising interest rates). They started with amortization to cool the market. Next may be the down payment requirements for CMHC. Interest rates can really only go up. The government no longer has that tool as an asset.
So what I am saying is, if we experience another crash, there isn't much the government can do this time, we already have all the tools deployed. Maybe bring back 30/35/40 year amortizations which would buy a little but of time but we are very quickly approaching the peak of affordability. Once that hits, there is no way further but down. Be it in a year or or ten years, prices are not going to climb much more. We are nearing the top of the rollercoaster. Tick. Tick. Tick. Tick.
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