branch condos oakville The risk of real estate bubble is soaring
branch condos oakville The risk of real estate bubble is soaring.The Bank of Canada is embracing the rapid rise in house prices, but this is not a normal response.
Especially at this time, the real estate market is overheating. In France, they are reducing leverage on buyers, shortening mortgage maturities and service ratios.
South Korea is going further, trying to limit debt and make speculation unprofitable. The country has even banned mortgages in some overheated markets.
New Zealand is working with its central bank to limit speculation. The government even said publicly that it would target investors.
Monetary policy is usually globally linked, with cheap money injected at the same time. However, each country has some local problems that need to be solved in different ways. Canada’s advocacy of higher house prices and unemployment shows that it has no real economic plan.
BMO warned that the risk of bubbles is quite different from those issued by other people in 2017. At that time, BMO believed that the rise of foreign buyers’ “small bubble” prices could be controlled. Today, if mortgage rates go up, they won’t.
If interest rates rise to the level before the pandemic, the real estate affordability will reach a “classic bubble”. If interest rates remain unchanged and prices continue to rise, it will reach that level next year. All roads lead to unsustainable price levels.
Canadian real estate prices are rising at the same time, usually a sign of bubbles. Synchronous risk is when local factors are eliminated and prices change together. When this happens, buyers ignore regional differences. Instead, they tend to buy just because of others. They think about risk even before they see their peers flourish and feel stupid.
The problem with synchronous risk is that it makes the entire asset class vulnerable. An unexpected shock will immediately have a chain reaction to multiple markets. You’re no longer worried about Toronto – the whole country.
The free market has done a good job in regulating lending risk. When the situation is unclear, interest rates will rise, which helps to reduce the leverage of borrowers. When the economy booms, interest rates fall, which helps to increase the leverage of borrowers. It’s a simple but effective process that capitalism uses to reduce risk.
Now, what happens when the state decides that people should increase leverage in a downturn? They eliminate market efficiency and create moral hazard. Home buyers now believe that if they can push prices up in a downturn, they won’t let the market collapse. Now people think that asset prices will be higher because they believe that the government will intervene in any adverse factors.