Thursday, June 30, 2011

Canada's Reserve Bank Adopts Novel Approach to Housing Boom

By Grant de Graf

Mark Carney, the Governor of the Canada's Reserve Bank has adopted a novel approach in dealing with his country's rising housing prices. Cognizant of the impact that a housing bubble can have on an economy, many practitioners have opted to use the traditional monetary policy instruments, effectively interest rates and quantitative easing, to curb high demand and spiraling home prices.

However, these powerful tools have side-effects and are typically non-discriminatory in application. The impact that they have are broad reaching and while a central banker may be focused on addressing a single aspect of the economy, such as rising home prices, invariably the consequence of higher interest rates extends to other areas of the economic equation, such as consumer demand, currency, manufacturing and exports.

Therefore, Canada's Mark Carney's approach to dealing with rising home prices through increased mortgage bank and home-buyer regulation, should be welcomed. While increased regulation is usually a constraint to economic growth, Carney's action should be praised for being able to focus on a concern within the economy, which has the ability to foster a level-headed approach to pricing, with laser precision.

In a country such as Israel, home prices have enjoyed run-away levels of appreciation. As its central bank has responded by increasing interest rates to constrain the demand for homes and place a cap on prices, currencies in some instances have also strengthened, placing economic growth and exports at risk.

Many argue that increasing interest rates runs contrary to the classical free market policies advocated by economist Adam Smith, and that government intervention is precisely the action that could facilitate a recession. In any event, regulation in Mark Carney's sense of application, is closer aligned to free market thinking, than that of interest rate adjustment.

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