Economists are sometimes unfairly portrayed as passionless bean counters in green eye shades, obsessively poring over dull columns of data. But deep down, some of them really like fairy tales, or at least metaphors that draw upon the great fables of the past.
Case in point: a “Goldilocks economy.” This popular economics term was imagined in 1992 by Salomon Brothers’ chief equity strategist David Shulman. Such an economy is not too cold, not too hot, but just right, all the way down the porridge line. As Investopedia defines it: “The term describes an ideal state for an economic system. In this perfect state, there is full employment, economic stability, and stable growth. The economy is not expanding or contracting by a large margin. A Goldilocks economy is thus warm enough with steady economic growth to prevent a recession; however, growth is not so hot as to push it into an inflationary status.” Economists, central bankers and real estate professionals all long for this state of fabulist bliss. On the way to this cozy place in the forest, they fear encountering the bears of recession or the big bad wolf of voracious inflation. Either detour is bad news for real estate markets in the GTA, Ontario and throughout North America. Central banks play key roles in writing the final chapter of the story. The skill, foresight or good fortune of the Bank of Canada or, in the U.S., the Federal Reserve, are important factors in determining the direction and velocity of economic activity. In Canada, the BoC’s program of escalating interest rates has predictably caused mortgage rates to spike. As mortgages become less affordable, fewer prospective homebuyers stay in the market. This has put an end to the post-pandemic bidding wars that lifted prices out of reach for many Ontario families. Despite the cooling demand, supply remains limited. In part, this is because home owners are reluctant to sell their properties knowing that they will need to take on a much more costly mortgage for their new residence once they sell. Millions of homeowners locked in rock-bottom mortgage rates during the period when the Bank of Canada was keeping interest rates at or near zero. These owners now ask themselves: Why sell a house with an affordable mortgage to buy a new house that comes with a substantially higher monthly payment? The Bank of Canada overnight interest rate now sits at 5 per cent, its highest level in more than two decades. That’s a dramatic increase from the 0.25 per cent benchmark rate of February, 2022. This not only affects new buyers, but also the large segment of the market that holds variable-rate mortgages, which today start at about 6.3 per cent. Variable rates are likely to adjust upward sooner than many new homeowners expect, constricting personal spending and adding to the debt burden of each household. Nationwide, that household debt now represents 199 per cent of disposable income, according to Statistics Canada. In Ontario, that figure is 218 per cent. These elevated debt levels, the highest of any G7 country, complicate the task of the Bank of Canada. Higher interest rates will help tame inflation and lower the probability of property market bubbles, but they will also add to this already towering mountain of household debt. The ending isn’t yet in sight, but the moral of the story is already clear: Rising debt, high home prices and a stalling economy are unlikely to create the conditions needed for a real estate market that is “just right.” Comments are closed.
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AuthorLarry Weltman is a Customer Service Representative for AccessEasyFunds Limited, or AEF, an Ontario-based firm Archives
November 2022
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