Bank of Canada rate interest hike will make homeownership harder: advocate

As many Canadians worry about impending interest rate increases, a local affordability advocate says when it comes to soaring home prices, low rates ultimately make home ownership harder.

Dr. Paul Kershaw, a policy professor at the University of British Columbia, says rapid inflation in housing prices has been the norm for the last 20 years.

Since 2000 Kershaw explains that the average home price across Canada has increased whopping 318 per cent. However, the overall rate of inflation reported by Statistics Canada, has gone up by less than 50 per cent.

 “There’s like a six-fold difference there,” Kershaw points out. “And that matters for the current debate because just like the right road signs help us keep safe by making traffic clearer and more predictable, we need the right economic signals to help steer our financial systems towards stability, prosperity, equity, a range of goals.

“The housing inflation signals Statistics Canada has been giving us the green light to speed recklessly through intersection after intersection — putting ourselves in real danger, because home prices keep rising and rising and rising. If we only got those signals right years ago, we could have recognized the perils of runaway housing inflation sooner — sparing in particular — younger generations, the challenge of dealing with soul-crushing levels of housing unaffordability.”

There is a “vicious cycle” that is kickstarted when StatsCan under-reports inflation Kershaw tells CityNews. In reaction, the Bank of Canada keeps interest rates low, which in turn allows for Canadians to borrow more and bid up the price of housing.

“You think you’d capture that problem because then we’d say inflation is going up, but no, StatsCan is under-reporting inflation as relates to housing.”

While the country may have a strong measure for the changes inflation to things like cauliflower and couches, Kershaw says the measure for the cost of living has been weak.

 “Now we’re in this difficult time where if we’re actually to slow down home prices, we really do need the Bank of Canada to be raising interest rates. Because at the systems level, when people can borrow more, they can bid up housing more, that raises housing prices, and if Statscan isn’t picking up that home prices are rising this much it doesn’t signal to the Bank of Canada ‘Oh, inflation on the rise,’ So they leave interest rates low and we keep fueling this biggest problem in our lives.”

Kershaw emphasizes the cost of food and furniture is important, but the biggest part of inflation that’s been harming Canadians has been set aside in the dialogue.

He suggests the Government of Canada task Statistics Canada annually publish a study about the relationship between Canada’s interest rates and the collateral damage to housing affordability.

 “Because let’s be clear, low-interest rates are good for fuelling the economy out of recessions. It’s been important during a pandemic. But it has likely had this very big collateral, unintended damage in housing. And we’re not reporting on that enough.”

Second, he points to a suggestion made by the Business Council of British Columbia which points out a measurement problem in how Statistics Canada calculates inflation and downplays the increase in inflation in existing homes.

“That is really causing us to then underreport inflation,” he says. “If you underreport inflation, you give rise to the darker side of our cheap credit system…The reason you should care about low-interest rates is that there’s a darker side to the cheap credit system. And that cheap credit system betrays many Canadians by fuelling home price increases far beyond what hard work can earn, devaluing our money, and devaluing our hard work. … So we need to resist the individual hack to fix the systemic problem.”

In reality, the cheap credit system has exacerbated Canada’s two-pronged crisis of housing unaffordability and wealth inequality. Renters, young or old, and newcomers to Canada all face crushing unaffordability, while many homeowners feel entitled to hold on to the wealth their homes have created.

“So we have been content, or at least ambivalent about eroding affordability because it makes many of us richer, and that is the broader issue.”

Kershaw suggests there are incremental steps we can take by increasing housing supply, revamping tax policies, and protecting renters, which are all important to ensure accurate information about inflation drives our monetary policy.

The Bank of Canada is indicating a rate increase of 0.25 is coming in March with more to follow — potentially tallying one percent by the end of the year. 

-CityNews