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Canada is world's biggest housing bubble: Atlantic magazine

A business article on The Atlantic magazine's website surmises that Canada is home to the world's most likely to burst real estate market. The Atlantic's Matthew O'Brien draws on analysis by Business Insider and The Wall Street Journal, and keys off a graph showing Canada's home prices are highest compared to rents.

He also notes some of the world's most expensive real estate markets, including Vancouver, are heavily sought by "wealthy Chinese looking to hedge their bets."

Writes O'Brien: "Canada is quietly trying to deflate its bubble without any eye-catching headlines. And that means keeping interest rates low while making mortgages harder to get. Now, raising rates to pop a bubble sounds like the kind of hard-hearted long view central bankers pride themselves on, but it's more hard-headed. Higher rates don't just make housing (or any other asset bought with borrowed money) less affordable for new buyers; they make them less affordable for old buyers with adjustable-rate loans too. That sends prices spiraling down and savings racing up, as heavily indebted households, which Canada has no shortage of, try to rebuild their net worths. Higher desired savings outpaces desired investment -- in other words, the economy collapses -- and subsequently cutting rates, even to zero, won't do much to reverse this, as houses and businesses are mostly indifferent to lower borrowing costs while they focus on paying down existing debts. It's what economist Richard Koo calls a 'balance sheet recession,' and it's a good description of how an economy can get stuck in a liquidity trap."

Given that challenge, O'Brien makes Canada's financial policy makers sound like they are trying to defuse a pipe bomb in the middle of a crowded shopping mall.  

"[B]y keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won't set off a vicious circle. In the best case, prices wouldn't fall, except below the rate of inflation, so that real prices decline without hitting household net worths."

Who else does O'Brien say is trying to make that delicate strategy work? China.

Read the whole article here.

David Beers is editor of the Tyee.

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