In 2000, the average price for a Canadian Home was just under $164 000. Adjusted for inflation, that’s $245 000 today. At the conclusion of 2022, the average price for a Canadian home was almost $748 000.
Everyone knows the housing market is hot. As soon as a “for sale” sign is staked into the ground, it’s replaced with one that says “sold.” Nonetheless, suppose you’re a young, prospective, home-buyer, who has your eye on a beautiful property. The yard is furnished with professional landscaping, the neighbourhood is conducive for raising a family, and the home is particularly impressive with all the modern amenities a couple could want.
The problem (for obvious reasons) is that it’s a rather substantial investment. Your credit isn’t superb because you’re relatively young, and no one knows if the government will lock us down tomorrow and freeze our incomes again. Usually, a home-buyer like yourself would have to exercise patience, hard work, and accumulate capital, before endeavouring on such a life-altering purchase.
“But the markets are different now!” you (and the government) tell yourself. “Interest rates are holding constant at .25%, money is flowing from the Bank of Canada (BOC) with minimal resistance, and finance bureaucrats are encouraging me to spend all you can.”
Thus, you excitedly enter your bank to acquire a mortgage.
After reviewing all of the relevant information, what does the bank do? They approve your request for a loan! After all, interest rates are extraordinarily low, everyone else is spending (so why not you?), and variable mortgage rates haven’t risen substantially in a long time. There’s nothing to worry about…right? We can have our cake and eat it, too! We’ve beaten the market!
But be warned, we haven’t beaten the market, and it’s impossible to do so. Ask Moody’s or Bear Stearns in 2008. Because the laws of economics always prevail, the BOC will have to tighten up interest rates sooner rather than later, and when that happens, catastrophe.
Why are we in this precarious situation?
• Abnormally low-interest rates incentivize people to spend their money as fast as possible (this rule applies to the housing market).
• Inflation drives the value of money down. If money is less valuable, why would you keep it? No one keeps worthless things.
• Knowing interest rates are low and money’s value is decreasing, people rationally decide to transfer that cash into other goods with value (like homes).
• As more and more people exchange money for a house, the demand for housing shifts to the right on the supply and demand graph. This means that housing prices increase.
• With low-interest rates and high inflation, the demand for houses is higher than it should be! Because demand for housing increased substantially (and artificially), prices have increased substantially as well. Everyone wants to get rid of their cash for a tangible asset. As fast as contractors can build homes, people buy them for prices higher than what they’re actually worth. The housing market is bubbled.
“Well, what’s wrong with that?” one might ask. “What’s wrong with higher housing prices?”
The question is welcome. There might be nothing wrong with these prices. Granted, a 300% increase in 20 years (31% in 2021) is astounding, but it might be a necessary response to maintain a steady equilibrium of supply and demand.
Yet there is a stubborn wrench in all of this. Look at the price of rent. It dropped 1.1% year-over-year at the time when the housing market had increased 31% year-over-year.* There is a discrepancy between housing and rent prices; that is not normal. It means there is a shortage (excess demand) for homes, not for places to live. Why is this?
The answer is plain. Low-interest rates and the hydra of inflation have induced regular renters to become homeowners. Young bachelors, young couples, part-time workers, or those on welfare assistance, have taken the low-interest bait trolled by government and banks and are purchasing homes they cannot afford. Sub-prime buyers are enjoying prime mortgage rates. This is why the market is inflated and ready to rupture.
However, there is hope! The solution to this crisis is independence!
Even if the bubble bursts while we are still a part of Canada, we know that government will be right there to blow it back up and repeat the cycle immediately. This is altogether undesirable.
What is desirable is creating a nation where markets are not interfered with by the grubby hands of big government. In an independent Alberta, we would encode policy and governance documents that remove government’s ability to manipulate money, housing, and other markets! For too long, self-interested politicians have pulled the market’s strings and satisfied their interests—this has facilitated our harm.
In an independent Alberta, a robust constitutional document with strict checks and balances on power would alleviate such problems! More than that, because our bureaucracy would shrink, it would be much easier to keep a watchful eye on politicians. More than that, if banks understood that they wouldn’t be bailed out by government, who would be willing to subvert market rules and hand out prime mortgages to sub-prime buyers? None! Therefore, the housing market would cool off, reflect the dynamic equilibrium it should encourage, and a prosperous Alberta would resolve the housing crisis.
*Here’s the citation for the housing price – https://www.google.ca/amp/s/www.cbc.ca/amp/1.6352127