Central banks are flooding economies with cheap credit, and trying to prevent bubbles. Well, some countries are trying to prevent bubbles. Canada has decided home price inflation is an uncontrollable consequence of the environment. In fact, the country’s central bank welcomed the rapid home price growth as “needed.”
That’s not normal. Not by a long shot. Other advanced economies facing rapid home price growth are trying to stop, and even pop, housing bubbles. Here’s a quick round up of how other countries are working with their central banks to maintain a low interest rate environment that doesn’t sacrifice the young.
The Low Interest Rate Problem
Most countries are embracing accommodative monetary policy these days. This is when central banks try to grow the money supply in a downturn, to stimulate the economy. They lower interest rates, and hope businesses and households use cheap credit. Businesses ideally use the cheap capital to expand operations, and buy inventory. Households ideally use the cheap cash to consume or finance large purchases. Consumption of goods and services is how economies work.
There’s one big problem that occurs when you give everyone cheap money – you don’t know how they’ll use it. In many cases, when people don’t know what to do with the credit, they begin to speculate and bid up asset prices. The dot-com bubble, Great Recession, and now the pandemic, are recent examples. They take already cheap credit, and try to make it cheaper to prevent a recession from getting worse, often creating a crisis.
Concentration of investors into any asset class is a problem, but it can be systemic if it’s a necessity. Residential real estate would be one of those necessities. While rising home prices can be a huge benefit to an economy, it needs to be under the right circumstances.
If home prices are rising with an economic boom, it’s good news. If home prices rise during record unemployment and low GDP growth, you have a big problem. Rapidly rising housing costs when people face fewer opportunities is less than ideal. It’s also a problem when those not impacted spend more of their income on debt service for shelter. This removes spending from the economy, making it harder to recover and slows growth. Chasing short-term growth this way can lead to a greater risk of catastrophic failure.
This is a tough problem for countries balancing short-term policy with long-term growth. Countries like Canada have opted to embrace the short-term gains, for long-term risk. Other countries aren’t so keen on seeing that happen. Instead, they’re implementing additional policies to run alongside low interest rates. Here’s what they’re doing.
France’s Central Bank Will Limit Leverage
The country that pioneered the vacancy tax, gave banks until the summer to tighten credit. The Banque de France is limiting mortgages to 25 years, and banning exceptions to anything above the 35% debt service ratio. Lenders have also been asked to limit total debt including insurance to 33% in most cases. Banks have already begun to comply with the request, but it is expected to become a requirement by summer.
South Korea Will Target Real Estate Speculation Mercilessly
The South Korean government is tag teaming speculators with the Bank of Korea. The country is launching a dual-pronged attack, limiting debt and making speculation unprofitable. The most notable policies involve limiting mortgages, taxing speculation, and increasing property taxes.
Mortgages in the countries’ hottest markets will be subject to new caps. Mortgage over ₩1.5 billion (US$1.3 million) will be banned in regions labeled “speculative” or “overheated.” The move is designed to reduce liquidity in the country’s hottest real estate markets. This would work to cap most home prices to the borrowing limit.
Short-term speculation will become less profitable due to increased capital gains taxes. Sellers of homes purchased less than a year before, will be hit with a 70% capital gains rate. The rate is reduced to 60% for those that sell after that, but before two years. The basic capital gains rate for housing will also have 30 points added. The idea is to treat “easy money” in housing more like regular income.
Multiple property holders will also be subject to a hefty additional property tax. Secondary properties will have to pay an additional property tax of up to 6% of the assessed value. Regions with higher taxes tend to be more affordable, since it forces a recurring link to income. The idea is to create a similar effect, that would be limited to those with second homes.
Reserve Bank of New Zealand Adds Housing Affordability To Policy Consideration
The New Zealand Government is making an “effective” housing market a priority. The government has said it will be a priority over the next year, and is the key to creating a sustainable and inclusive economy. They took the first step by asking the Reserve Bank of New Zealand (RBNZ) to consider home prices when setting policy.
The full details of what’s coming will be announced later this year, but the RBNZ has asked for more tools. One of the most interesting is the use of debt-to-income ratios, which will be used to limit leverage. The government didn’t mince words when they explained what they’re trying to do. The new rules “will apply only to investors,” said the deputy prime minister.
Bank of Canada Thinks It “Needs” Real Estate Price Growth
The Bank of Canada (BoC) governor, when asked about taming home prices, said “we need the growth.” The Government of Canada hasn’t mentioned home prices since the pandemic started.
That’s it. That’s the response.
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