How Housing Price Estimations May Affect The Canadian Economy

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Housing Prices of Canada

Housing is one of the most influencing good or commodity of the market. Historical evidence such as the financial crisis of 2007 has shown the power of the price change in the housing industry. This paper is going to talk about how the recent estimation regarding the change of housing price may affect different sectors of the Canadian economy.

Housing prices of Canada

Housing prices in Canada like most part of the world is very instrumental in stabilizing the national economy. The rise in the hourly wage rate of the workers in Canada has led to an increase in the average annual income of the customers. With higher income, the preference for own home has come in into play, shifting the housing demand curve to the right side (Rathore, 2018). While, according to the principle of economics, under unchanged circumstances rightward shift in the demand increases the price for the normal good, rising income elasticity of demand for the house may further increase the price for the housing as wage increases in the future years.

However, red tape interventions from the side of the government have also been seen to keep a check on the price of the house in Canada. The government in May this year have enacted a price ceiling in the housing market below the equilibrium price level. Muehlenbachs, Spiller & Timmins (2015) noted that a price ceiling below the equilibrium price can become a binding price ceiling leading to an excess demand in the market compared to the supply.

Despite the effort from the side of the government, the price ceiling could not be made sustainable. The tighter fiscal policies have led to an increasing in interest rate which further put pressure on the aggregate demand of the economy. Apart from that, the unemployment rate figures of the economy also showed evidence of influencing the demand for the new house. Simultaneous shortage of supply hence resulted in an unstable housing market of Canada even after the intervention from the government.

The pricing pattern and the changes in the industry of housing in Canada also have been influenced by the structure of the market. Hoffmann & Lemieux (2016) stated that the structure of the market is characterised by the number of sellers and consumer along with the powers they have on the price making of the market. The Canadian housing market is a close example of oligopoly as the number of sellers is very small. Corresponding to that, the buyers are huge in number as depicted in the discussion above. Adding to that, the sellers of the market have differentiating features to the product they sell in the market. This allows the different sellers to have some power to set the market price by them. However, if seen from the perspective of the housing market as a whole, the power over the market price of a seller is dependent on the strategic move of the other sellers. Apart from that, curtails have also been seen in the housing market of Canada that have led to an increase in the price of houses (Panagiotidis & Printzis, 2016). The government has stepped in to demolish any kind of curtail between the sellers to bring down the prices without the help of a price ceiling that generates an excess demand in the market. However, housing firms in Canada have used price signalling as a method to keep the prices high among themselves. 

Factors Behind Housing Prices

The situation of excess demand and higher prices for the houses in Canada may soon be enhanced in the future as the economy is operating at the boom phase of the business cycle. The GDP of the country has been increasing after a recessionary phase post-2013 (Charles, Hurst & Notowidigdo, 2016). Therefore, the unemployment rate is expected to reduce further along with the aggregate demand. Lose government policies such as limited control over the housing market can add to the proposed increase in inflation due to the business cycle (Cable, 2018). Inflationary pressure due to the cost-push inflation may skyrocket the prices of housing in the near future.

With the increase in the price for the housing in Canada, the negative externality generated by the industry also needs to be noted in the future. Excess demand and higher estimated wages of the labours can directly increase the production if the government does not control the market. Higher the housing production, more the pollution and the degraded air quality in the urban and suburban regions of the country. Even with the intervention of the government in the market, the chance of developing a black market is high of excess demand occurs with low controlled prices for the housing. Housing prices can further influence the labour market as well, as it is highly associated with the unskilled labour market of the country (Kubota, 2015).

The higher requirement of labour and hence the rightward shift in the labour demand curve can increase the wage which may further have multidimensional effects on the overall aggregate demand for goods and the services in the economy. One of the best ways, the government can tackle the highly estimated prices for housing in Canada is by providing common properties for the lower segment of the housing buyers of the market. Common goods can ease the high demand in the housing market leading to a stable price and the equilibrium in the housing market in the future (Anundsen et al. 2016). From the perspective of the government, a stable housing market is important to have a stable national economy.

Conclusion

Therefore, rising housing prices are going to be a great challenge for the Canadian government in the coming years. While abolishing curtails among the sellers needs to be governed, provision of common resources can also help ease the pressure from the demand side of the market.

Reference

Anundsen, A. K., Gerdrup, K., Hansen, F., & Kragh?Sørensen, K. (2016). Bubbles and crises: The role of house prices and credit. Journal of Applied Econometrics, 31(7), 1291-1311.

Best, M. C., & Kleven, H. J. (2017). Housing market responses to transaction taxes: Evidence from notches and stimulus in the UK. The Review of Economic Studies, 85(1), 157-193.

Cable, J. (2018). Rate rises, red tape to keep a ceiling on Canadian house prices: Reuters poll. REUTERS. 

Charles, K. K., Hurst, E., & Notowidigdo, M. J. (2016). Housing Booms, Manufacturing Decline, and Labor Market Outcomes. The Economic Journal.

Easthope, H., Stone, W., & Cheshire, L. (2018). The decline of ‘advantageous disadvantage’in gateway suburbs in Australia: The challenge of private housing market settlement for newly arrived migrants. Urban Studies, 55(9), 1904-1923.

Hoffmann, F., & Lemieux, T. (2016). Unemployment in the Great Recession: a comparison of Germany, Canada, and the United States. Journal of Labor Economics, 34(S1), S95-S139.

Kubota, R. (2015). Race and language learning in multicultural Canada: Towards critical antiracism. Journal of Multilingual and Multicultural Development, 36(1), 3-12.

Muehlenbachs, L., Spiller, E., & Timmins, C. (2015). The housing market impacts of shale gas development. American Economic Review, 105(12), 3633-59.

Panagiotidis, T., & Printzis, P. (2016). On the macroeconomic determinants of the housing market in Greece: A VECM approach. International Economics and Economic Policy, 13(3), 387-409.

Rathore, M. (2018). Canada's urban hotspots set for subdued house-price rises in 2019: Reuters poll.