Ksquare condos . Canadian real estate market rebounded? Bank of Canada Governor Borroz recently made an important speech saying that the current rebound in the Canadian property market has aroused the great concern of the central bank.Please Visit: Ksquare condos to Get Your VVIP Registration Today!
The last time the governor of the Bank of Canada made a similar statement was at the end of 2016, when house prices in Toronto and Vancouver were rocketing. Mr Poroz, who will leave office in June, surprised many analysts by issuing a sudden warning to the property market. Mr Poloz believes that the strong recovery in the property market has raised concerns that some unhealthy factors have triggered potential speculation, which has happened in the past, followed by a sharp reversal in prices, which has had an impact on the Canadian economy as a whole.
Analysts had speculated that the Bank of Canada might open the door to interest rate cuts this year, but in his first appearance in the new year in 2020, Governor Poloz still seemed worried that a reduction in interest rates would trigger excessive speculation in the real estate market.
With regard to the crazy bull market in the real estate market, a report by the Fraser Institute, a Canadian think-tank, has revealed the fundamental reasons: the rise in house prices is mainly driven by the desire to invest in real estate rather than by a shortage of housing. As house prices continue to rise, homeowners expect prices to continue to rise, so they are reluctant to sell and do not want to sell their houses cheaply. Therefore, according to this logic, no matter how much housing is built, it is still unable to meet the demand.
Fraser College pointed out sharply: the surge in house prices in Toronto and Vancouver is actually an explosion of investment demand to buy a house to make money driven by low interest rates. This is the real reason for the rise in house prices.
The Fraser report addresses a key issue that many people don’t notice: the credit cycle.
According to Fisher’s “credit and deflation” principle, both the economy and real estate are affected by the credit cycle. So, when the financial tsunami hit in 2008, the debt level of the whole society was overextended and the Bank of Canada was faced with the choice of ending a credit cycle and starting all over again by paying off debt and reducing leverage.
But if overextended companies are allowed to fail, a large number of workers lose their jobs, property loans are unrepaid and the banking system is hit, it will be a heavy blow to the economy. As a result, in order to extend the credit cycle, the central bank cut interest rates sharply so that enterprises can catch their breath, get a lot of credit, and be able to carry out normal reproduction, the job market is stable, people’s home loans can still be paid, and the banking system is preserved.
When everyone is happy, everyone will ask who will bear the responsibility. Don’t think about responsibility. Everyone has a share and no one is responsible for the excessive expansion of the last credit cycle. But someone is bound to bear the consequences. The central bank releases liquidity by lowering interest rates, handing profits to companies and real estate, and passing losses on to savings and retirees.
Credit is an addictive product, in the stimulation of low interest rates, asset prices should fall, but are artificially held up; in order not to let asset prices fall, it is necessary to continue to issue additional credit and prolong the credit cycle. Over time, savings and retirees began to feel at a disadvantage, withdrawing bank funds on a large scale and investing them in the most leveraged industries, namely real estate. The sharp rise in house prices in recent years is actually a manifestation of the shortage of assets.
Judging from past experience, the balance sheets of both the Federal Reserve and the Bank of Canada continue to expand, and Canada’s debt, from the government to the private sector, is growing desperately, which means that extending the credit cycle is an inevitable means. the government cannot afford the deflationary consequences of the Great Depression caused by the collapse of the credit cycle.
The problem is that the current household debt level of Canadians has been maintained at more than 175%, and American real estate could not hold up when household debt levels were lower in 2007. As a much smaller economy than the United States, the delicate relationship between Canadian real estate and the economy is treading on thin ice.
In the face of heavily indebted Canadians, the Bank of Canada has gritted its teeth for the past 12 months and failed to follow the pace of global central bank interest rate cuts, and analysts at Bay street have been calling for at least one insurance rate cut in 2020.