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The model shows that increasing interest rates while fixing housing prices will cause an increase in inflation, which is interesting because most people believe

The model shows that increasing interest rates while fixing housing prices will cause an increase in inflation, which is interesting because most people believe that increasing interest rates is an effective way to reduce inflation. The accuracy of this analysis is acknowledged to be limited to the five-year mortgage terms common in Canada. But I don’t see a justification for fixing housing prices. If we assume that a decent fraction of people have maximally extended themselves to buy their homes, then when forced to remortgage at a higher rate those people would instead sell and downsize, rent, move in with family, etc. A model which allows demand to change as a function of monthly mortgage cost could yield completely different dynamics. That said, awesome analysis. It was really interesting to learn that home price increases and interest rate decreases have basically perfectly balanced each other to keep mortgage payments flat. And we’ve just run out of interest rate decreases…

jbay808 4y ago
Sorry, I just saw your comment now. Not sure if you'll notice this reply. > But I don’t see a justification for fixing housing prices. There is no justification for fixing house prices; that is an assumption made purely to consider the result of that hypothetical scenario, to examine what the consequence would be of housing prices not falling. The reason this scenario is worth modelling is simply because many Canadians do strongly believe that housing prices will not fall, so I want to examine what the world would look like with this belief being correct. I also consider a scenario where housing prices drop by half. If rates keep going up as quickly as they are, I actually think it's plausible that housing prices drop more than this, but I have to pick a number that won't cause readers to simply tune out. The model so far is only a partial model; housing demand is not included, but it could be in the future. Then housing prices would not need to be taken as an input, and could be projected forward. But I'm not sure it's worth the time to build that model; no matter how rigorously I derived it, I don't think it would change anybody's minds. Canadian housing prices are a charged topic and the beliefs people hold are pretty hard to change.
imtringued 4y ago
Increasing interest rates causes people to hoard money over the short term but since interest is being reinvested rather than spent this leads to an increase in the money supply over the long term. If you want to stop long term inflation you actually need 0% interest rates or lower for 0% inflation like Japan.
- jbay808 4y ago
  Neo-Fisherism is pretty far from mainstream acceptance.

jbay808 4y ago

Sorry, I just saw your comment now. Not sure if you'll notice this reply. > But I don’t see a justification for fixing housing prices. There is no justification for fixing house prices; that is an assumption made purely to consider the result of that hypothetical scenario, to examine what the consequence would be of housing prices not falling. The reason this scenario is worth modelling is simply because many Canadians do strongly believe that housing prices will not fall, so I want to examine what the world would look like with this belief being correct. I also consider a scenario where housing prices drop by half. If rates keep going up as quickly as they are, I actually think it's plausible that housing prices drop more than this, but I have to pick a number that won't cause readers to simply tune out. The model so far is only a partial model; housing demand is not included, but it could be in the future. Then housing prices would not need to be taken as an input, and could be projected forward. But I'm not sure it's worth the time to build that model; no matter how rigorously I derived it, I don't think it would change anybody's minds. Canadian housing prices are a charged topic and the beliefs people hold are pretty hard to change.

imtringued 4y ago

Increasing interest rates causes people to hoard money over the short term but since interest is being reinvested rather than spent this leads to an increase in the money supply over the long term. If you want to stop long term inflation you actually need 0% interest rates or lower for 0% inflation like Japan.

jbay808 4y ago
Neo-Fisherism is pretty far from mainstream acceptance.