interest-rates-cool-canada-housing-market Photo: Oliver Mallich/Flickr

When one of the country’s largest newspapers is publishing a headline that reads “The housing boom is ripping apart the financial fabric of Canadian life,” you can feel confident that some form of government policy intervention is likely on the horizon.

The issue, of course, is centred on single-family housing markets across the country, where low interest rates and pandemic-inspired changes in buyer preferences are driving a record-breaking price surge. Market experts are worried that dangerous levels of speculation may set prices on a path to a painful correction, destabilizing the financial system and broader economy.

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We’ve already heard that any long-term solution to the challenges that face the country’s housing market must include a sustained and targeted increase in supply, but in the short-term, TD Chief Economist Beata Caranci believes that the fastest way to address what she calls “rampant home prices in Canada” is by raising interest rates.

“The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel,” Caranci wrote in commentary published earlier this month on the TD Economics website.

Noting that Canada experienced a larger overall cut to mortgage rates relative to other countries recently, Caranci said that the Bank of Canada’s current stance of keeping its mortgage market-influencing overnight rate extremely low for potentially several more years is “no longer appropriate” considering how red-hot the housing market has been for nearly a full year now.

Instead of trying to tamp down homebuyer demand through “additional complex rules” like taxes and a more stringent mortgage qualification process, the economist suggests that policymakers should look to the principle of Occam’s Razor in which the simplest explanation is usually the right one.

Caranci describes the sharp drop in mortgage rates as the catalyst that drove the jump in sales and sustained demand for housing, so the simplest and most effective solution to cooling the market is then hiking rates.

To fully address the market’s current challenges, in the longer term Caranci also supports a more robust effort to collect data on home flipping and investor activity in the market as well as government action to reduce barriers to home building and create more affordable rental supply.

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