Does the Canadian government create a new real estate bubble?

Since 2009, the housing market has experienced a complete cycle in Canada.

In 2009, prices reached a record low. Since then, prices have risen at a breakneck pace. Prices rose so high that most people could no longer afford real estate.

In the last couple of years, housing prices in Canada have begun to fall. The Canadian government started a series of initiatives to encourage homebuyers to return to the market. These initiatives are strikingly similar to those the United States Government took to support housing prices. Many think the Canadian government’s policies could lead to another housing bubble.

Canadian Government Adopts Policies

The housing market is not affordable for millennials. They have only recently joined the workforce. Many of them also have student loan debt. With their low wages, many need help to afford to purchase real estate in Canada. The housing market and related industries have been affected by this.

For this reason, developers and financiers have been pressing the Canadian government to ease lending standards. Canadian banks are currently calculating affordability using a hypothetical interest rate of 2% above the actual rate. The banks will only lend to those who can afford a higher interest rate. Developers and financiers wanted to see this change. The Canadian government, however, has yet to succumb to the temptation.

Canada’s other policies could be better. Justin Trudeau, for example, has allocated $1.25 billion to assist first-time homebuyers.

The Canadian government plans to use the public money collected by taxation to finance people’s homes. The Canadian government plans to own about 10% of the equity in people’s homes. The minimum down payment requirement will be avoided.

If the home’s value is $100, the buyer must pay $10 in advance. The government will pay another $10, and the bank will finance the remainder. It is similar to lowering loan underwriting standards.

The only difference between the two is that the Canadian government, using taxpayer-funded money, is taking direct positions in the housing market.

If the housing market increases, then the Canadian government will benefit. The Canadian government will lose if it does not. This is not a government loan but rather an equity stake.

The Canadian government, fearing backlash from taking on excessive risks, has set the eligibility for this policy to $120,000. Only families earning less than $120000 are eligible for this offer.

The cash that is disbursed can be, at most, four times the salary of the family. The maximum disbursement will be $480,000, which is no small sum.

The Canadian government has implemented several loose policies in the real estate sector.

The government allows people to borrow more money from their retirement funds if they wish to invest in real estate—the limit used to be $25,000 per individual. The limit has been increased to $35,000 for each person. A couple can invest up to $70,000 in the housing market by borrowing from their retirement.

The Canadian government also offers tax incentives to developers building rental units. The government will spend $10 billion on this scheme over the next ten years.

What will be the impact of these policies on the market?

Below are some of the negative impacts of this policy.

Increased Indebtedness:

The Canadian government is making the same mistakes as the American government. The government must understand that more debt can only be the answer if indebtedness causes the problem. Canada’s latest policies aim to provide more debt to those who can’t afford houses due to their existing debt. It is similar to the subprime program. The government is allowing people who should not be able to get loans.

Government intervention:

The markets are the best at allocating capital.

Canada’s government is attempting to replace the market by making capital allocation decisions in its place. This intervention will result in capital being correctly allocated to housing. It means that capital will be assigned to other industries with a higher level of productivity where there is actual consumer demand. Every dollar spent on housing programs has taken money away from different sectors.

The Canadian government behaves like the parents of many first-time homebuyers. It takes equity stakes in houses owned by ordinary people. This policy is unprecedented, and it threatens to magnify bubbles in the Canadian housing market.

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