Rising Interest Rates Will Make Canada’s Housing Crisis Even Worse
Canada’s highly precarious housing market has long been perched on the edge of disaster. As the country’s central bank pushes up interest rates to fight inflation, that perch is looking more dangerous than ever.
Posessions of a homeless person in Vancouver, Canada’s Down Town East Side (DTES), from 2018. (Ted McGrath / Flickr)
In an article that I wrote for Jacobin in January of this year, I discussed the precariousness of the housing market in Canada. I highlighted the fact that housing prices were going up faster than in any other OECD country. I also stressed that the threat of substantial increases in interest rates could well produce catastrophic results. Six months later, the international creep toward global recession and the specter of a stagflation crisis has brought matters to a head.
In March of this year, home prices were still moving up rapidly in Canada, stretching affordability to its outer limits. According to Better Dwelling, Canada is now “second on the OECD house price to income ratio index.” Preliminary moves by the Bank of Canada to push up interest rates have led to a cooling of the housing market, with an almost 22 percent drop in home sales.
In spite of interest rate hikes, the likelihood of an orderly adjustment leading to a stabilized housing market is very remote. At the international level, a major strategic shift is underway that is leading to sharp rate increases that have dire implications for workers and hard-pressed communities. This approach poses the danger of an unprecedented housing crisis in Canada.
A recent debt survey, conducted by Manulife, found that “nearly one in four homeowners say they will have to sell their home if interest rates go up further.” The survey also concluded that “two-thirds of Canadians do not view home ownership as affordable in their local community.” The effects of these conditions are laid out in no uncertain terms: “Close to half of indebted Canadians say debt is impacting their mental health, and almost 50 percent of Canadians say they would struggle to handle surprise expenses.” Clearly, any further aggressive movement on interest rates will lead to quite grim results.
Who Will Foot the Bill?
Canada’s central bank is operating within a global consensus on interest rate policy that has toughened dramatically in the last few weeks and that shows no sign of moderating. The Federal Reserve has “raised benchmark interest rates three-quarters of a percentage point in a move that equates to the most aggressive hike since 1994.” The Bank of England has taken similarly decisive steps, with a minority of its monetary policy committee actually voting for even more extreme measures than those that were adopted.
In this context, it is hardly surprising that the Bank of Canada is falling into line. Having already “upped its interest rate by a half point two times in recent months,” the bank will very likely follow the US example next month, with probable further increases in the near future.
The Bank of Canada’s governor, Tiff Macklem, is not unaware of the implications of the course his institution has embarked upon. He acknowledges that “high household debt and elevated housing prices have become bigger vulnerabilities in the past year.” He nevertheless maintains that “we think the economy needs higher interest rates, and it can certainly handle higher interest rates.”
Macklem’s indifference to the hardship he is ready to unleash is expressed clearly in his cold-blooded observation that “our primary focus is getting inflation back to target. You know, monetary policy is not housing policy.” He also believes that “some moderation in housing activity” would be a good thing. Unfortunately, for working class people, “housing activity” does not mean losing real estate revenues — it means ensuring that there is actually a home to live in.
Class War
The threat of a greatly intensified housing crisis is only one element of what the present attack by the central banks represents. Fed chairman Jerome Powell, who admits that “there could be some pain involved in restoring price stability,” is very clear that finding an effective way to “get wages down” is a key consideration.
Powell is keeping up appearances and maintains that he would like to avoid an all-out economic downturn, but the economists at the Deutsche Bank are not so diplomatic. In April, they issued a report that included the view that “we regard it . . . as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.”
Central banks’ commitment to hiking interest rates can be described as an act of class war. This is not simply because it will result in workers losing their jobs, driving down wages, and people losing their homes. What is striking about the approach is its class-driven selectivity.
There is ample evidence that price gouging and the maximization of profits are playing the leading role in shaping this crisis. A report compiled by Unite in the UK drives this home very clearly indeed. In Canada, almost two-thirds of workers are seeing their wages fall behind the rate of inflation. Yet the “cure” will be designed to preserve profits. And it will inflict more of the perennial pain on working-class people that fixes for crises always seem to require.
The considerable impact of rate hikes on the housing situation in Canada will by no means be confined to homeowners. The huge number of tenants who work in precarious low-wage jobs will be directly in the firing line, as will those who must try to survive on grossly inadequate social benefit programs. In the wake of the pandemic and the economic hardship it has generated, many tenants having fallen behind in their rent and are already at great risk of eviction. In Ontario, where I live, the online landlord-tenant hearings that were introduced during the pandemic lockdown period have been used to put people out of their homes in a fashion that constitutes a mockery of justice.
Oil on the Fire
As rising interest rates increase levels of unemployment, the tattered net of federal and provincial income support systems simply won’t enable people to stay housed. Over the last several decades, the Canada-wide unemployment insurance system has been undermined disastrously. The social assistance systems operated at the provincial level are entirely incapable of providing any hope of paying the rent and putting food on the table. In Ontario, social assistance rates have been frozen since 2018, ensuring that, for those forced to try and survive on them, the present cost-of-living crisis has had a devastating impact. Doubtless, the Bank of Canada governor would be ready to point out that “monetary policy” doesn’t concern itself with such matters.
The increase in the scale of homelessness that will result from interest rate increases is also nightmarish in its implications. Because Toronto City Hall has decided that a back-to-business post-pandemic approach was in order, massive police operations have been undertaken to drive unhoused people from the encampments they had set up in public parks. As city bureaucrats parrot the false message that there is enough safe shelter space to meet peoples’ needs, private security guards are setting up encampments in the parks. As the numbers of people losing their housing significantly increases in the coming period, they will confront a situation where they are denied basic shelter and their homelessness is treated as a police problem.
The driving up of interest rates is a classic example of seeking to impose on working-class people the burden of a crisis that they are not responsible for. It will mean huge job losses, the driving down of wages, and, particularly in the Canadian context, a huge and ugly aggravation of the housing crisis. These multilayered impacts and those politically responsible for them will have to be challenged by workers and communities in a very serious fashion.
We must redouble our efforts to organize unorganized workers, especially in the low-wage precarious sector. We must oppose any and all attempts to force workers to accept concessions and wage cuts. We must rally communities to defend tenants facing eviction. We will have to ensure that unhoused people are not abandoned to the streets and swept from view.
We will need to defend hard-hit racialized communities that face racist police persecution. We must resist and defeat the attempt to make working-class people foot the bill for the inflationary crisis, and leave the central bankers no choice but to conclude that their “solution” will not work out in the way they hoped.