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Bank of Canada raises its interest rate to 5%

74 points by colinprince 3y ago

xemoka 3y ago
It constantly seems like the BoC and the Government are at odds when it comes to inflation. Government spends, gives out cash to help (grocery rebate program) and the BoC raises rates. I guess the grocery rebate is aimed at lower incomes, and it’s redistribution, but that’s not the only example. The fund and spend, but not too much growth conflict throws me for a loop.
- osigurdson 3y ago
  I'm certain if this is the intent, but the end result is a smaller middle class.
- itsoktocry 3y ago
  >The fund and spend, but not too much growth conflict throws me for a loop. This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.
  - belval 3y ago
    I don't want to delve into politics, but I would not call the BoC unaccountable. Their goal is to juggle employment and inflation by setting the interest rates. Inflation is/was high and unemployment was low, that calls for increased interest rates (especially as the US is raising rates anyway). The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
    - itsoktocry 3y ago
      >I would not call the BoC unaccountable To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so. Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
      - belval 3y ago
        > Have the people of Canada been asked what the best balance of inflation and unemployment is? I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party. The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.
- no_wizard 3y ago
  In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at) This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank. Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money. [0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting [1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.
  - gustavus 3y ago
    > In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
- Tiktaalik 3y ago
  The independent actions are impacting different parts of the market. The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis. Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages. (now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)
- kypro 3y ago
  The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion. In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist. In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government. But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt. I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing. It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.
  - mitthrowaway2 3y ago
    I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
  - 3y ago
mitthrowaway2 3y ago
The BoC seems to me to have now locked themselves onto a path of finally crushing the Canadian housing bubble. Which comes at an awkward time as Canada is suddenly increasing its population at a record pace. No matter how this plays out, it's not likely going to be a smooth ride.
- bparsons 3y ago
  It isn't working so far. Prices continue to go up, housing starts are down.
  - rogerkirkness 3y ago
    And permits are way higher than houses being built, it's more like market failure.
    - seti0Cha 3y ago
      I don't know much about this area so maybe you can unpack this for me. Are you saying people are getting building permits, but not actually building? Why would that be happening? And what about the market is causing it?
      - chongli 3y ago
        They’re not building because they believe they can earn more profit by waiting for property values to go up.
        gffrd 3y ago
        … and a permit is required to hold the property? (I'm curious why people are having permits issued if they have no plan to build) Is this like domain names?
        voisin 3y ago
        Parent comment is incorrect. No one goes through the costs of design and permitting and planning approvals to do nothing and hope prices go up. You’d wait and land bank and then do it when you were ready to develop. Developments have been put on hold because interest rates skyrocketed and inflation in construction costs has as well. So original business plans are no longer viable.
manishsharan 3y ago
Prices are going up unchecked. Our food chain is owned by an oligopoly. We have cut our taxes so much that our education and healthcare is severely underfunded. I know none of this is the fault of Bank Of Canada. But they need to step out if their ivory towers and see the families struggling with rent and mortgage payments.
- treeman79 3y ago
  Wait, you’re claiming to not pay enough taxes? Best way to reduce poverty is to cut taxes.
  - bryanlarsen 3y ago
    The poor don't pay income tax, their carbon tax rebate is higher than what they pay in carbon taxes, and the GST rebate mostly offsets the GST they pay. OTOH, they greatly benefit from many programs paid for with taxes. Cutting taxes helps the rich, not the poor.
  - bob-09 3y ago
    > Best way to reduce poverty is to cut taxes. How does that work? I would assume making up for lost tax revenue involves cutting public services that people in poverty rely on.
    - VancouverMan 3y ago
      Despite the high taxation, Canada's public services are quite limited, inefficient, and of rather low quality. Taxation is also just a small part of the government-imposed economic problems that Canada is facing. Canada's invasive regulatory overhead and high property/rental costs, for example, make it quite difficult to start and successfully operate small businesses. Small businesses are what truly pull people out of poverty, both as entrepreneurs and as employees. Even something as inherently simple as hiring an employee, for example, is far more difficult and costly than it should be in Canada. It often makes more sense for owner-operators to shoulder the burden themselves rather than hiring, even if it means they're over-worked. We can't forget that some small businesses will eventually grow into larger ones, providing even more employment opportunities, too. The more that the Canadian government has gotten involved in the Canadian economy, the worse the situation has gotten.
Tiktaalik 3y ago
The federal government seems completely disengaged in the issue and they've left the entire problem to the bank, whose only tool here is to continue to ratchet up rates, no matter how much pain this is causing homeowners (and eventually renters as investors bail on their properties, thus likely inducing the eviction of their tenants). Meanwhile in Spain where their government has been quite engaged and busy on the issue, enacting policies to limit severe price increases, they've already reached the 2% inflation target. Another way is possible.
- hospitalJail 3y ago
  Isnt it TBD if Spain made the right call? Action doesn't necessarily mean things are good.
  - Tiktaalik 3y ago
    I guess. But at the moment they've hit 2% without inducing the same financial level of trauma on homeowners. Seems like a success so far. Wait and see I guess.
- belval 3y ago
  > policies to limit severe price increases What does that even mean? In Canada the issue is that most places have 10 houses for 20 buyers to it ends up being a game of who can pay more as it should be. Restricting price increases just means buyers are restricted on something else, it does not magically create 10 new houses to meet demand. We should not be rent-controlling assets, instead you need to take actions that match the number of houses to the number of buyers. You can do that by: 1. Incentivizing builders to build 2. Reducing immigration (at least in Canada) 3. Changing zoning laws to build more densely 1. is not appealing because in Canada there is a strong sentiment against growing the urban sprawl. 2. is not something the government wants to do 3. is what they've been doing for the last 10 years but turns out people don't want an apartment, they want a detached house with a yard and they are willing to put more money on it to meet their expections. Price control is not any kind of solution to the Canadian housing problem. It would create private listings and all sorts of parallel systems so that people who can pay more can still pay more.
bitcurious 3y ago
If one of the largest drivers of inflation is housing, why does the government not balance this act with 0% loans to developers/the construction industry? Drive the supply while slowing demand.
- ars 3y ago
  That's not necessary - developers are happy to build. They just need to relax zoning, and also open more areas to constructions. (i.e. make a suburbs, that will over time be subdivided into an Urban area.)
  - voisin 3y ago
    This is the answer. No need to assume a conspiracy among a massive, dispersed group of developers across the country! The issue is zoning and NIMBYism.
  - VancouverMan 3y ago
    Anyone who has followed the development of mid-scale or large-scale residential projects in Canada's major cities will have seen that the construction phase itself is perhaps the easiest and often the quickest part of the process. This is true even for large concrete highrises. One to three years of construction can easily be eclipsed by the unnecessary, onerous, and very lengthy "planning" processes imposed by government, especially if tribunals, appeals, and other bureaucratic overhead is imposed on a project.
- guerrilla 3y ago
  Probably because property owners lobby very hard* against that in order to maintain the price of their holdings. * that and ouright corruption.
- softfalcon 3y ago
  I think it likely has something to do with lobbying by said developers and property holders who don't want interest rates to go up. Their whole gamble is building big construction projects sold to investors looking to diversify their portfolio by grounding some of their holdings as physical real estate. As a held asset, these investors want their assets to grow in value, or at the very least, remain stable. If interest rates rise, the sky rocketing prices of real estate slows. This negatively affects the investors asset ratings and their ability to continue to loan against those assets to do even more with their money/assets. This vested interest is a shared agreement between big investors, large builders, and their subsidiaries. Actually building houses that are affordable to real people has absolutely nothing to do with their game plan.
kaycebasques 3y ago
Canada homeowners have a lot of adjustable-rate mortgages, right? How are these rate increases playing out? Is there any data on the percentage of homeowners who are past the fixed-rate initial period and are therefore immediately seeing the rate hikes reflected in their bills?
- jrockway 3y ago
  The article discusses this and says that the average homeowner is paying $1200 extra per year now. Oddly the average mortgage payment, according to that article, is around $4300. Lot of expensive homes in Canada, I guess. (I only pay $3200 in New York City, at 6.5%!)
  - frankus 3y ago
    To be fair, that's about the same with the exchange rate, but the fact that the average mortgage cost across all of Canada is the same as one of the most expensive US markets is telling.
  - kaycebasques 3y ago
    I'm looking for different data than what the article presents. The article mentions what a hypothetical owner that is past the fixed-rate grace period pays. I am looking for the percentage of homeowners overall that actually falls into that bucket that feels these rate hikes immediately. For example, if (hypothetically) 100% of the adjustable rate mortgages were opened last year, and they all had a 7-year fixed-rate grace period, then the rate hike doesn't actually affect any of them right now.
  - armanboyaci 3y ago
    I am not sure but another reason could be the mortgage duration. In US 30-year is very common, according to my quick google search in Canada most mortgages are limited to a 25-year amortization period.
    - rpeden 3y ago
      25 year amortization period, but even most "fixed rate" mortgages are only fixed for a 5 year term, at which point you have to renew at the prevailing rate. You can get a 10 year fixed rate but you'll pay a substantially higher interest. So many people with a fixed rate are still forced to renew for another term at a much higher rate right now. But as you mentioned, the shorter total duration probably explains part of the differential as well. That, and very high property prices in many parts of the country.
appleaday1 3y ago
Some related posts https://www.reddit.com/r/canadahousing/comments/14xpj48/bank_of_canada_raises_rates_again_in_july_to_500/ https://www.reddit.com/r/canadahousing/comments/14xpj48/bank... https://www.reddit.com/r/canadahousing/comments/14xpo3h/bank_of_canada_raises_policy_rate_25_basis_points/ https://www.reddit.com/r/canadahousing/comments/14xpo3h/bank... https://www.reddit.com/r/CanadaHousing2/comments/14xphmd/bank_of_canada_raises_policy_rate_25_basis_points/ https://www.reddit.com/r/CanadaHousing2/comments/14xphmd/ban...
frankus 3y ago
An interesting take awhile back on this exact issue: https://jbconsulting.substack.com/p/on-shelter-futures-part-1 https://jbconsulting.substack.com/p/on-shelter-futures-part-.... The fear (now largely realized) is that increasing interest rates mechanistically drive up inflation (because of how the price index is calculated in Canada), which the Bank of Canada combats by...raising interest rates. Includes a good discussion of just how potentially screwed the housing market is. (Also an interesting example of a market where "prices expand to fill the available money", which I have a hunch is a good indicator of a supply-constrained market).
- naasking 3y ago
  > Includes a good discussion of just how potentially screwed the housing market is. Housing in Canada has been screwed up for over a decade.
71a54xd 3y ago
Real estate in Montreal is strikingly affordable given the build quality and location. I'm not sure I'll every quite understand it relative to residential real estate in New York or Austin. It's insane that for a paltry $400k USD in Montreal you can buy a luxury 2br condo. Although, with all the talks of interest rates... does Canada have a similar policy for mortgages where there is not true concept of a "fixed rate" mortgage for a term longer than five years? I was stunned to learn that in New Zealand mortgages aren't backed by the gov in most cases so mortgage rates are assessed every 3-5 years - which is insane.
- nubinetwork 3y ago
  Nobody wants to live in Quebec though because of the francophone laws.
  - 71a54xd 3y ago
    Is it really that bad? I've spent about a month per year there and I wasn't too bothered.
    - Mozai 3y ago
      Recently it's become illegal to provide civil services in any language but French; this includes services that are government funded, like public libraries. There are four exceptions to this rule: you're First-Nations or Inuit, you arrived less than six months ago, you can provide proof you used English exclusively with the government before 2021, you can provide proof you are a student at an English-speaking school. There's also the warrantless search-and-siezure powers held by the Office Quebecois de la Langue Francaise (OQLF) where they can walk into any business unannounced and inspect your internal correspondence to make sure your employees are only using French. Employers who wish to hire an employee whose primary language isn't French must submit a written explanation to the OQLF as to why. Any companies with more than 25 employees can be asked by the OQLF to submit scheduled reports on how they are protecting use of French in their workplaces. Ask wikipedia about "Pastagate"; things have become more severe since.

74 points by colinprince 3y ago

It constantly seems like the BoC and the Government are at odds when it comes to inflation. Government spends, gives out cash to help (grocery rebate program) and the BoC raises rates. I guess the grocery rebate is aimed at lower incomes, and it’s redistribution, but that’s not the only example. The fund and spend, but not too much growth conflict throws me for a loop.

osigurdson 3y ago
I'm certain if this is the intent, but the end result is a smaller middle class.
itsoktocry 3y ago
>The fund and spend, but not too much growth conflict throws me for a loop. This is easily explained by the fact one is an elected body that has to appeal to the people, while the other is essentially unaccountable. But I agree, the conflicting strategy is not optimal.
- belval 3y ago
  I don't want to delve into politics, but I would not call the BoC unaccountable. Their goal is to juggle employment and inflation by setting the interest rates. Inflation is/was high and unemployment was low, that calls for increased interest rates (especially as the US is raising rates anyway). The government not cutting spending is an appeal to the people though. Seems like the BoC is the one acting like grown ups.
  - itsoktocry 3y ago
    >I would not call the BoC unaccountable To whom are they accountable? Poilievre has been campaigning on threats to apply pressure on the BoC, but there's no mechanism to actually do so. Have the people of Canada been asked what the best balance of inflation and unemployment is? Or has the BoC decided for us, despite how the average Canadian might be harmed in the process?
    - belval 3y ago
      > Have the people of Canada been asked what the best balance of inflation and unemployment is? I know this is a rhetorical question, but yes people of Canada will be voting on that issue in October 2025 (or before) when they elect their government. The BoC is still very much ruled by parliment and their mandate is set by the elected party. The reason their mandate does not change with every whim of public opinion is precisely because people don't like the medecine (high interest rates). Alternatively they also dislike high inflation and labor shortage caused by record-low unemployment.
no_wizard 3y ago
In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at) This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank. Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money. [0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting [1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.
- gustavus 3y ago
  > In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
Tiktaalik 3y ago
The independent actions are impacting different parts of the market. The meagre supports we've seen from the government to date are largely micro-targeted at low income persons who are most feeling the existential threats of this inflation crisis. Meanwhile the BoC raising interest rates is dissuading wealthy business owners and investors from further investment and expansion, actions that at least at first are targeted at limiting business investment by the 1% and limiting consumer spending by the top 10% that own homes with big mortgages. (now if the bank goes overboard and induces a recession, well then those 1% business owners will go on and start layoffs, which will start to have some broader effects...)
kypro 3y ago
The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion. In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist. In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government. But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt. I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing. It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.
- mitthrowaway2 3y ago
  I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
- 3y ago

mitthrowaway2 3y ago

The BoC seems to me to have now locked themselves onto a path of finally crushing the Canadian housing bubble. Which comes at an awkward time as Canada is suddenly increasing its population at a record pace. No matter how this plays out, it's not likely going to be a smooth ride.

bparsons 3y ago
It isn't working so far. Prices continue to go up, housing starts are down.
- rogerkirkness 3y ago
  And permits are way higher than houses being built, it's more like market failure.
  - seti0Cha 3y ago
    I don't know much about this area so maybe you can unpack this for me. Are you saying people are getting building permits, but not actually building? Why would that be happening? And what about the market is causing it?
    - chongli 3y ago
      They’re not building because they believe they can earn more profit by waiting for property values to go up.
      - gffrd 3y ago
        … and a permit is required to hold the property? (I'm curious why people are having permits issued if they have no plan to build) Is this like domain names?
        voisin 3y ago
        Parent comment is incorrect. No one goes through the costs of design and permitting and planning approvals to do nothing and hope prices go up. You’d wait and land bank and then do it when you were ready to develop. Developments have been put on hold because interest rates skyrocketed and inflation in construction costs has as well. So original business plans are no longer viable.

manishsharan 3y ago

Prices are going up unchecked. Our food chain is owned by an oligopoly. We have cut our taxes so much that our education and healthcare is severely underfunded. I know none of this is the fault of Bank Of Canada. But they need to step out if their ivory towers and see the families struggling with rent and mortgage payments.

treeman79 3y ago
Wait, you’re claiming to not pay enough taxes? Best way to reduce poverty is to cut taxes.
- bryanlarsen 3y ago
  The poor don't pay income tax, their carbon tax rebate is higher than what they pay in carbon taxes, and the GST rebate mostly offsets the GST they pay. OTOH, they greatly benefit from many programs paid for with taxes. Cutting taxes helps the rich, not the poor.
- bob-09 3y ago
  > Best way to reduce poverty is to cut taxes. How does that work? I would assume making up for lost tax revenue involves cutting public services that people in poverty rely on.
  - VancouverMan 3y ago
    Despite the high taxation, Canada's public services are quite limited, inefficient, and of rather low quality. Taxation is also just a small part of the government-imposed economic problems that Canada is facing. Canada's invasive regulatory overhead and high property/rental costs, for example, make it quite difficult to start and successfully operate small businesses. Small businesses are what truly pull people out of poverty, both as entrepreneurs and as employees. Even something as inherently simple as hiring an employee, for example, is far more difficult and costly than it should be in Canada. It often makes more sense for owner-operators to shoulder the burden themselves rather than hiring, even if it means they're over-worked. We can't forget that some small businesses will eventually grow into larger ones, providing even more employment opportunities, too. The more that the Canadian government has gotten involved in the Canadian economy, the worse the situation has gotten.

Tiktaalik 3y ago

The federal government seems completely disengaged in the issue and they've left the entire problem to the bank, whose only tool here is to continue to ratchet up rates, no matter how much pain this is causing homeowners (and eventually renters as investors bail on their properties, thus likely inducing the eviction of their tenants). Meanwhile in Spain where their government has been quite engaged and busy on the issue, enacting policies to limit severe price increases, they've already reached the 2% inflation target. Another way is possible.

hospitalJail 3y ago
Isnt it TBD if Spain made the right call? Action doesn't necessarily mean things are good.
- Tiktaalik 3y ago
  I guess. But at the moment they've hit 2% without inducing the same financial level of trauma on homeowners. Seems like a success so far. Wait and see I guess.
belval 3y ago
> policies to limit severe price increases What does that even mean? In Canada the issue is that most places have 10 houses for 20 buyers to it ends up being a game of who can pay more as it should be. Restricting price increases just means buyers are restricted on something else, it does not magically create 10 new houses to meet demand. We should not be rent-controlling assets, instead you need to take actions that match the number of houses to the number of buyers. You can do that by: 1. Incentivizing builders to build 2. Reducing immigration (at least in Canada) 3. Changing zoning laws to build more densely 1. is not appealing because in Canada there is a strong sentiment against growing the urban sprawl. 2. is not something the government wants to do 3. is what they've been doing for the last 10 years but turns out people don't want an apartment, they want a detached house with a yard and they are willing to put more money on it to meet their expections. Price control is not any kind of solution to the Canadian housing problem. It would create private listings and all sorts of parallel systems so that people who can pay more can still pay more.

bitcurious 3y ago

If one of the largest drivers of inflation is housing, why does the government not balance this act with 0% loans to developers/the construction industry? Drive the supply while slowing demand.

ars 3y ago
That's not necessary - developers are happy to build. They just need to relax zoning, and also open more areas to constructions. (i.e. make a suburbs, that will over time be subdivided into an Urban area.)
- voisin 3y ago
  This is the answer. No need to assume a conspiracy among a massive, dispersed group of developers across the country! The issue is zoning and NIMBYism.
- VancouverMan 3y ago
  Anyone who has followed the development of mid-scale or large-scale residential projects in Canada's major cities will have seen that the construction phase itself is perhaps the easiest and often the quickest part of the process. This is true even for large concrete highrises. One to three years of construction can easily be eclipsed by the unnecessary, onerous, and very lengthy "planning" processes imposed by government, especially if tribunals, appeals, and other bureaucratic overhead is imposed on a project.
guerrilla 3y ago
Probably because property owners lobby very hard* against that in order to maintain the price of their holdings. * that and ouright corruption.
softfalcon 3y ago
I think it likely has something to do with lobbying by said developers and property holders who don't want interest rates to go up. Their whole gamble is building big construction projects sold to investors looking to diversify their portfolio by grounding some of their holdings as physical real estate. As a held asset, these investors want their assets to grow in value, or at the very least, remain stable. If interest rates rise, the sky rocketing prices of real estate slows. This negatively affects the investors asset ratings and their ability to continue to loan against those assets to do even more with their money/assets. This vested interest is a shared agreement between big investors, large builders, and their subsidiaries. Actually building houses that are affordable to real people has absolutely nothing to do with their game plan.

kaycebasques 3y ago

Canada homeowners have a lot of adjustable-rate mortgages, right? How are these rate increases playing out? Is there any data on the percentage of homeowners who are past the fixed-rate initial period and are therefore immediately seeing the rate hikes reflected in their bills?

jrockway 3y ago
The article discusses this and says that the average homeowner is paying $1200 extra per year now. Oddly the average mortgage payment, according to that article, is around $4300. Lot of expensive homes in Canada, I guess. (I only pay $3200 in New York City, at 6.5%!)
- frankus 3y ago
  To be fair, that's about the same with the exchange rate, but the fact that the average mortgage cost across all of Canada is the same as one of the most expensive US markets is telling.
- kaycebasques 3y ago
  I'm looking for different data than what the article presents. The article mentions what a hypothetical owner that is past the fixed-rate grace period pays. I am looking for the percentage of homeowners overall that actually falls into that bucket that feels these rate hikes immediately. For example, if (hypothetically) 100% of the adjustable rate mortgages were opened last year, and they all had a 7-year fixed-rate grace period, then the rate hike doesn't actually affect any of them right now.
- armanboyaci 3y ago
  I am not sure but another reason could be the mortgage duration. In US 30-year is very common, according to my quick google search in Canada most mortgages are limited to a 25-year amortization period.
  - rpeden 3y ago
    25 year amortization period, but even most "fixed rate" mortgages are only fixed for a 5 year term, at which point you have to renew at the prevailing rate. You can get a 10 year fixed rate but you'll pay a substantially higher interest. So many people with a fixed rate are still forced to renew for another term at a much higher rate right now. But as you mentioned, the shorter total duration probably explains part of the differential as well. That, and very high property prices in many parts of the country.

appleaday1 3y ago

Some related posts https://www.reddit.com/r/canadahousing/comments/14xpj48/bank_of_canada_raises_rates_again_in_july_to_500/ https://www.reddit.com/r/canadahousing/comments/14xpj48/bank... https://www.reddit.com/r/canadahousing/comments/14xpo3h/bank_of_canada_raises_policy_rate_25_basis_points/ https://www.reddit.com/r/canadahousing/comments/14xpo3h/bank... https://www.reddit.com/r/CanadaHousing2/comments/14xphmd/bank_of_canada_raises_policy_rate_25_basis_points/ https://www.reddit.com/r/CanadaHousing2/comments/14xphmd/ban...

frankus 3y ago

An interesting take awhile back on this exact issue: https://jbconsulting.substack.com/p/on-shelter-futures-part-1 https://jbconsulting.substack.com/p/on-shelter-futures-part-.... The fear (now largely realized) is that increasing interest rates mechanistically drive up inflation (because of how the price index is calculated in Canada), which the Bank of Canada combats by...raising interest rates. Includes a good discussion of just how potentially screwed the housing market is. (Also an interesting example of a market where "prices expand to fill the available money", which I have a hunch is a good indicator of a supply-constrained market).

naasking 3y ago
> Includes a good discussion of just how potentially screwed the housing market is. Housing in Canada has been screwed up for over a decade.

71a54xd 3y ago

Real estate in Montreal is strikingly affordable given the build quality and location. I'm not sure I'll every quite understand it relative to residential real estate in New York or Austin. It's insane that for a paltry $400k USD in Montreal you can buy a luxury 2br condo. Although, with all the talks of interest rates... does Canada have a similar policy for mortgages where there is not true concept of a "fixed rate" mortgage for a term longer than five years? I was stunned to learn that in New Zealand mortgages aren't backed by the gov in most cases so mortgage rates are assessed every 3-5 years - which is insane.

nubinetwork 3y ago
Nobody wants to live in Quebec though because of the francophone laws.
- 71a54xd 3y ago
  Is it really that bad? I've spent about a month per year there and I wasn't too bothered.
  - Mozai 3y ago
    Recently it's become illegal to provide civil services in any language but French; this includes services that are government funded, like public libraries. There are four exceptions to this rule: you're First-Nations or Inuit, you arrived less than six months ago, you can provide proof you used English exclusively with the government before 2021, you can provide proof you are a student at an English-speaking school. There's also the warrantless search-and-siezure powers held by the Office Quebecois de la Langue Francaise (OQLF) where they can walk into any business unannounced and inspect your internal correspondence to make sure your employees are only using French. Employers who wish to hire an employee whose primary language isn't French must submit a written explanation to the OQLF as to why. Any companies with more than 25 employees can be asked by the OQLF to submit scheduled reports on how they are protecting use of French in their workplaces. Ask wikipedia about "Pastagate"; things have become more severe since.