Sensible solutions will solve Canada’s outsized issues
It was such a big deal at the time.
Way back in 2016, when the federal government imposed a stress test on future homebuyers, the two percentage point buffer was the subject of controversy and much lobbying in the name of affordability and improving access to real estate. It seems so mild in hindsight. The stress test, of course, was meant to ensure borrowers could reliably handle higher payments if rates were ever to rise. At the time, critics, especially those in the real estate sector, complained that the stringency of the test was overkill.
Fast forward to now, with rates having risen 4.25 percentage points over the space of 15 months, and we could allow that the stress test has blunted the pain.
“The policy was very useful,” Bank of Canada governor Tiff Macklem said last week. “It helps households right now to be more resilient as interest rates rise.”
But it seems like a small buffer indeed in the face of the extra payments so many homeowners will soon be paying as they turn over their mortgages. The Bank of Canada flagged this week that, due to its rate hikes, monthly payments will rise by 20 to 40 per cent in the next few months.
And yet Toronto home prices have climbed for the past three months in a row, defying the odds as demand outstrips supply and making us all wonder how such market conditions could possibly be sustainable. It doesn’t help that households in Canada are more indebted than in any other G7 country, with homeowners’ mortgages responsible for three quarters of that debt, according to the Canada Mortgage and Housing Corp.
It’s just the latest example of policy tools and government tweaks that pale in comparison to the challenges that come flying at us as the Canadian economy strains to adapt to a churning world where every new twist and turn is supersized.
Predicting the amplitude of the next challenge is a mug’s game, and calibrating government policy to match is even trickier. Recent history shows this is the case.
When the pandemic stifled the global economy as we know it, the policy response in Canada was fairly traditional at first. But as the enormity of the pandemic hit, the federal government quickly and dramatically bulked up the emergency benefits for individuals, businesses and organizations — to the point where we are still perplexed over the after-effects. Higher savings, higher deficits and higher prices are the toll that the pandemic and its responses are still taking on the Canadian economy.
Inflation, which surged around the world, was met slowly at first with timid rate hikes. By the time central bankers realized inflation was intransigent, they had to drive rates up rapidly, historically fast. And they have yet to wrestle inflation to the ground.
When Russia invaded Ukraine, Canada and its allies imposed round after round of increasingly stringent sanctions and creative attempts to alienate Russia from the global economy. But Russia seems impervious and keeps on fighting.
And when it comes to government support for cutting emissions and pushing energy production towards low carbon, some subsidies — especially around electric vehicle production — have been larger than life. It’s still too soon to say if all that money will succeed in unlocking the investment that’s required to build the new infrastructure that takes us to net-zero emissions by 2050.
We are in a confusing time of compounding crises and interconnected challenges that have meant that the problems and solutions, both, are so often unprecedented that it’s become cliché to describe them as such. But as we’re discovering, supersized crises aren’t necessarily resolved by supersized policy responses.
And so it’s worth remembering and appreciating some of the policy basics that hold the economy together over time, even in the face of turmoil.
As countries around the world, including Canada, search for ways to become more resilient in the face of all the turmoil, we shouldn’t forget that efficient and predictable regulation paves the way for companies to invest with confidence and stay competitive for the long term. A solid set of rules for approving infrastructure and natural resource development, for example, is not nearly as spectacular as a big pile of subsidies — with all the attendant ribbon-cutting. But if the goal is to unleash private-sector investment, we know that streamlined regulation that encourages collaboration with the private sector stands the test of time — and supports economic growth.
So does a calm, steady eye on the fiscal track. Predictability in government spending, a responsible approach to deficits and transparency in budgeting are the keys to public confidence in government’s ability to solve the big problems when they arise.
In the past, Canada’s sensibleshoes approach to managing the economy has stood the country’s economy in good stead, which is easy to ignore given the challenges before us.
Housing market dynamics and household indebtedness are particularly precarious right now. Many mortgage holders have a bit more time to figure out their finances before higher payments come due, as Bank of Montreal senior economist Robert Kavcic noted this week. And governments are looking hard to find ways to curb speculation and increase the supply of housing at the same time.
Stitching together sensible solutions seems to be our best hope for finding balance for now, despite the supersized risks on our hands.
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As we’re discovering, supersized crises aren’t necessarily resolved by supersized policy responses. — Heather Scoffield