Why Canada has just about the worst house price bubble in the world
Central banks typically raise rates in these situations, the "hard-hearted" approach. But Canada is trying a quieter approach, essential given the high rates of debt.
Canada has a new worthwhile initiative. After years of booming prices, that bastion of politeness north of the border is looking to avoid a catastrophic housing bust for something more, well, boring.
|Chart from the Economist|
But by 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. This strategy is hardly unique — China has done the same the past few years — but it has the very Canadian name of “macroprudential regulation.”