Slowing Canada's housing market
Canada is actively trying to slow its housing market without using interest rates. Australia, take note.
Aside from a baffling reverence for curling – surely the oddest sport in the world – Canadians and Australians are stunningly similar. Both countries share a Commonwealth history, a large landmass, small populations and abundant natural resources. And both came through the GFC with banking systems intact and reputations enhanced.
Like Australia, Canada routinely faces warnings that house prices are a bubble waiting to burst. That's contentious. What is clear, however, is domestic banking oligopolies have grown rich lending against property in both countries. If house prices fall as they have elsewhere in the world, a genuine banking crisis is possible. So the Canadian government pays close attention to housing market froth.
Unlike Australia, Canadian regulators have been increasingly active in trying to slow the housing market. Whereas in Australia, higher interest rates are the sole tool employed, Canada has been far more thoughtful.
Earlier this year, the Finance Minister announced a host of new laws; loan durations in Canada will fall from 30 years to 25 years; refinancing will be capped at 80% of equity, down from 85% and, even then, will only be permissible if housing costs are less than 40% of household income. Most importantly, borrowing against equity for consumption has been capped at 65% of property value. Combined, these policies are estimated to lift mortgage costs by an average of 1%.
If the RBA raised interest rates by 1% tomorrow, there would be howls of protests and criticism. Australia appears to have constructed a collective belief that higher rates are always bad and lower rates always good. By targeting the housing market specifically without using interest rates – which would slow the rest of the non-housing economy too – the Canadians have cannily avoided the public pitfalls. Australia, meanwhile, continues to indulge in idiotic policies like the First Homeowners Grant. Perhaps there is something to learn from the curling loving Canadians.
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