Okay folks do you know the difference between correlation and causation? I can’t imagine that mortgage rates are the primary driver of housing costs. It seems like a lack of supply, the growth of private equity in the housing market, and the mismatch of utilization where empty nesters are staying in their houses for longer than they need.
Unfortunately this is a pretty good example of misunderstanding major vs secondary market forces. Key word major, since the rest of your points are correct, just not as correct, with the exception of your point on limited supply, which is also a major driver.
When you have super-low interest rates, you can pay a higher sticker price on the house per equivalent dollar of mortgage payment. Therefore the price of the house can rise to the point of people bearing the mortgage payment. This affects everyone, and creates bidding wars because the sticker price of the home doesn’t actually matter; the cashflow effect absolutely does.
In the case of PE entering the market, that’s a secondary effect of low interest rates. PE operates pretty exclusively on leverage, so without super low rates they wouldn’t be entering the market because it wouldn’t be as profitable.
You might also say that boomers’ homes being underutilized is actually a secondary effect of the major driver of limited supply. If boomers have to consider the option of moving into a smaller place like a condo (which may be less price-stable compared to a detached home due to condos being more commodified), or an assisted living / seniors community (which likely has a higher cashflow impact than keeping their paid-off home), then why bother making any change at all?
TL;DR - the government needs to get back in the housing development game; we need to maintain a higher interest rate environment (as distasteful as that might sound to some); and what we really need is immediate blanket rezoning for aggressive densification (like Calgary city council is currently attempting).
Also fun fact: the Conservatives support none of those things, so, y’know, consider that when voting in a few short years.
I get what you are saying with biding war because of free money due to low interest rates. I am not going to deny that it’s a factor. The thing is there is a mismatch of supply and demand. Where the demand far out of strips supply prices go up regardless of other factors. This can be seen in markets where consumer financing doesn’t play a role in prices. We still see a rise in prices due to the bidding war. Fundamental high interest rates can’t increase supply and can only do so much for demand to the inelastic nature of housing. If housing was much more elastic then yeah interesting rates would be a bigger factor. But we all need to live somewhere so it can only become so elastic.
We don’t have an incorrect interest rate (regardless of what it is) we have a market failure. Market failures are not solved by adjusting the economic levers, they are solved by regulation. Higher interest rates will not stop private equity from using housing as an investment. They will not incentivize empty nesters to down size. It will make construction loans more expensive though, which I would suspect will further incentivize home builders to build higher dollar houses. As returns on starter spec homes are thin already.
So I stand by my assertion that this may not be causation and just correlation. I would suspect we get much more movement on home affordable if we were to let the interest rates sit where it is best for the economy. Then address the regulatory environment instead. Which you did allude to with zoning regulations as one area to address.