- Written by Duncan
"The Canadian housing market is strong, but it is not experiencing a bubble," Paul Jenkins, senior deputy governor of the Bank of Canada said recently. In order to catch up with the US, the Canadian Government is working to create a housing bubble of it's own, somewhere near New Brunswick. The idea is that so few people will want to live there, the demand will never keep up with the supply.
Housing bubbles are created by surface tension, or the difference between the supply and demand for housing. The supply creates tension from the inside, whereas the demand creates tension on the outside of the bubble.
When supply exceeds demand, as in the US, the bubble expands and may burst. The thickness of the wall of the bubble is controlled by the Federal Reserve (or in Canada The Finance Ministry) with incentives such as the First-Time Homebuyer Tax Credit. These seek to increase the demand to create surface tension on the outside surface of the bubble to cause it to shrink. Unfortunately, as a bubble starts to expand, the Federal Reserve has to contribute more exponentially according to the formula .
At some point, the bubble gets too large to maintain, and it bursts. Most people think this is an undesirable thing, and in most cases they would be right. However, from a Government perspective, there are other things to consider. For example, how come the US are working on a second bubble, and Canada has not even had one yet? The disparity causes a loss of face for Canadians, who try to keep up with the US.
The Canadian government recently brought in new mortgage rules to cool the housing sector and prevent home buyers, tempted by record low interest rates, from overextending themselves. This effectively will reduce the demand for housing, which means the surface tension from the supply of housing will become larger in comparison. This inequality will further expand the housing bubble in Canada, which is located in the outskirts of New Brunswick.
Billionaire investor Warren Buffett told Berkshire Hathaway investors that the U.S. residential real estate market will recover sometime in 2011. This will be good for everyone, because then we will all be on a level playing ground, where we can create new bubbles, perhaps more than one this time.
On hearing this, the Canadian finance minister went out to buy himself a pair of new shoes, prior to announcing a new budget in parliment later this week. He bought a pair of comfortable ECCOs at a cost of $271.20. The expectation is that that further Canadian bubbles are in the budget, combined with sharp increases in taxes and further government spending to help develop sufficient surface tension to sustain a housing bubble, perhaps somewhere in Saskatchewan this time.
The Centre for Alternative Policies and Redundant Titles Centre (CAPRTC) said that this was just the wrong thing to do, since additional taxes will deflate the economy, and put more people out of work. There is no way that Saskatchewan can support any more unemployed workers, and that the housing bubble should go in Toronto, where they can afford to have such a luxury.