A record mismatch between housing demand and supply is forcing economists to reconsider the role interest rates will play in cooling runaway house prices.
In the U.S., mortgage rates have already jumped to 5 per cent, which is an 11-year high. “Standard economic models suggest that an increase of that magnitude should weigh substantially on housing, the most interest-rate-sensitive segment of the economy and the textbook channel of monetary policy transmission,” Ronnie Walker, a U.S. economist at Goldman Sachs, wrote in a note to clients.
This dynamic is supported by fresh data on U.S. housing starts released Tuesday. Despite a major jump in mortgage costs since the start of the year, housing starts in March beat expectations, rising 0.3 per cent month-over-month instead of the estimated decline. “The market may have some room to run yet before the Fed’s tightening cycle becomes a binding constraint,” Shernette McLeod at TD Economics wrote in a note to clients.
The economists who wrote about the dynamic this week were focused on U.S. housing, but there are many parallels to Canada. For one, U.S. housing inventory is at a record low, and Canada is close to its own. Nationally, at the end of March, there were 1.8 months of inventory in Canada, only slightly higher than the record low of just 1.6 months in the previous three months, according to the Canadian Real Estate Association, or CREA. The long-term inventory average is more than five months.
Maybe if the politicians stopped raising the dev charges and levies builders could build something cheaper!
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