Regular readers know I'm a bit of a pundit. I try to leave politics out of economics/RE most of the time, but then I read Sh$t like this and I can't help myself.
Some regular readers may know my origins don't lie in this town we collectively view as paradise within Canada. I'm actually a prairie-boy with ties to a certain City of Champions which still holds my sports allegiances (Go Oilers!). Regardless, when I read this kind of pick-on-the-West that has been long constitutionalized within our great, united [sic] nation, I can't help but think back to the great slogan that characterized the Trudeau/Lougheed battle of the early 1980s: "Let those Eastern Bastards Freeze in the Dark!"
Let's highlight some of the main points of this Ottawa-centric author, shall we?
- when the Bank of Canada raises interest rates to reduce inflation, it works by deflating the whole economy — fewer people find jobs, families have a harder time paying mortgages and car loans, businesses invest less because it costs more to borrow capital. In short, there are real costs to higher interest rates
- in Canada, inflation is higher than the bank's target of 2 per cent, but that average disguises a lot. In both Ontario and Quebec, the year-over-year all-items price increase is below 2 per cent
- Alberta's is 5 per cent
- When David Dodge raises interest rates, it is to slow down the Alberta economy. The rest of Canada is collateral damage (How 'bout BC?)
- Because Alberta has permitted uncontrolled exploitation of its oil and gas resources, there is a shortage of almost everything in that province... This inevitably drives prices sky high. So the bank acts to bring price increases down by raising interest rates until it hurts
- In the early 1990s, as the Bank of Canada took interest rates through the ceiling, Ottawa and the provinces continued borrowing money to stimulate the economy (Actually, Alberta didn't. They [under Klein] got their fiscal house in order by making significant cuts to government spending, unlike every other province, including BC)
- Governments cannot spend their way out of the negative effects of higher interest rates, doing so only causes the bank to raise rates higher
- Today, we have an analogous situation in Alberta, but this time it is caused by the super-stimulation of high oil prices and the fevered search to exploit every possible hydrocarbon resource all at the same time (Please, Mr. Mendelson, ignore HELOCs and rising RE values along with lower interest rates across all of Canada in your "let's just blame the West" argument)
- Higher interest rates will eventually throw a wet blanket over these economic fires
- But the blanket will cover all of Canada, not just Alberta. And with the higher loonie that interest-rate hikes will reinforce, the rest of Canada's economy will already be at a snail's pace. Higher interest rates are a not a good solution.
- This Wild West of exploitation needs to be inhibited by a government policy of moderate restraint, such as a moratorium on new leases for exploration; the discouragement of any further oil-sands projects at least until the infrastructure to house and feed workers has caught up; the investment of excess government revenue outside of Alberta and even outside of Canada; a fair increase in royalties in the oil sands, at least to international norms; and much more careful assessment of the environmental costs of projects against their economic benefits
- The question for the rest of us is how much we are going to have to pay if Alberta continues in its unrestrained ways
OK. I apologize profusely if my argument has become too political and left you scratching your heads thinking "what the F#$& has this to do with RE in Victoria?" Simply put it goes something like this: our markets are interconnected. That old adage of "location, location, location" is just marketing. Monetary policy--the amounts governments spend, save and borrow--has everything to do with your home's actual value.
Loose monetary policy (really low interest rates) has the effect of artificially raising values. Hence today. Some call that inflation. What's a government to do. Nothing. It's why we have an arms-length central bank. They get to wear the repercussions of belt-tightening (interest rate hikes).
So what's a consumer to do (us)? Nothing. Except make our finances ship-shape, wait for the others to panic, and do well in the investment markets (both RE and equities) by doing what everyone else isn't: as in buying when they are selling, saving when they are spending, and selling when they are buying. How's that working out for those who do it? Don't take it from me. But I tend to trust the world's (now) third richest man, Warren Buffet, who's made a lot of people extremely rich by employing that strategy and grumbling at silly, politically-driven monetary policy like that which Mr. Mendelson suggests would be prudent for Ottawa to implement so that he can run for public office sometime in the not so distant future...