In a country like ours, with its vast expanses and abundant natural resources, housing and energy should be cheap. Yet over the past two decades, housing prices have shot up much faster than the growth in incomes, and now energy prices are doing the same. In both cases, much of the blame is on government.
The prolonged rise in housing costs is largely a result of restrictive land-use regulations from city and provincial governments and chronically low-interest rates from the Bank of Canada. And the same institutions that have driven housing costs to nosebleed heights are now pursuing energy policies, including restrictions on the development of fossil fuels, that are making energy ever-more expensive.
With brief exceptions, we’ve had historically low-interest rates for more than 20 years now. After 9/11, central banks around the world cut rates in an effort to stave off a recession. From 4.25 per cent in August 2001, the Bank of Canada’s target for the overnight rate fell to just two per cent in January 2002. After a brief rise to 4.5 per cent by 2007, the rate was back down to 0.25 per cent in April 2009, after the financial crisis. More recently, after a brief fling with nominally higher rates (though only 1.75 per cent, in late 2018), the bank drove interest rates back down to 0.25 at the onset of COVID, and that’s where it remains two years later.
Liquidity and lots of it is often the best response to a crisis but low interest rates for two decades induce moral hazard, with cheap money flowing into stocks and real estate. More people taking on cheap mortgages to chase scarce housing has created the perfect storm of unaffordable housing prices.
Central bankers are not wholly to blame, however: in many jurisdictions, politicians have pursued policies that have made land much more expensive. An example is former Premier Dalton McGuinty’s creation of Ontario’s “green belt” in 2005, which squeezed the supply of land available for building. Meanwhile, ever-rising development fees and regulatory delays have made land more expensive in cities across Canada.
As for energy, governments and central bankers are following the same policy path: squeezing supply. Bank of Canada Governor Tiff Macklem and former governor Mark Carney both endorse, explicitly and implicitly, net-zero policies that aim to essentially wipe out fossil fuels by 2050. So, too, do other central bankers, banks, financial institutions, lenders and insurers worldwide.
In 2019, Carney observed that companies that do not reduce their carbon emissions would be punished by shareholders. It may have been simply an observation, but the wish is father to the thought: given his position on fossil fuels, net-zero and the late 2021 COP 26 conference in Glasgow, there’s no mystery about Carney’s ultimate goal: fossil fuels have to go, whether or not green alternatives can replace them, either in cost or performance.
In the meantime, of course, lower production of coal, natural gas and oil is leading to price spikes. Green dreams don’t change the reality that consumers, businesses and governments still need reliable energy and are all chasing the same increasingly limited supply.
The problem with such policies is that, by the time the damage to affordability is done, it is always too late. It was only last month that Macklem said the Bank of Canada would be paying close attention to the housing market in gauging interest rates. But with the benchmark price of housing in both Vancouver and Toronto running at $1.26 million, Macklem’s plan to pay “close attention” is years late.
The same thing looks like it will happen in energy. When the last vestige of coal used for electricity is killed off and capital investment in natural gas and oil is squeezed out, the price of fossil fuels will rise to well above their current values.
From gas prices for your fill-up to the cost of heating your home (if you can afford one), recent spikes are just the start of a long trend resulting from a politically directed and central-bank encouraged policy strategy. Killing off cheap energy will be as much a disaster for poor and middle-class Canadians as our calamitous housing policies have been.
Mark Milke is president of The Aristotle Foundation for Public Policy, a new think tank set for launch later this year.