In this article, CIBC chief economist Avery Shenfeld warns the canadian government about trying to control the household debt from mortgages. I chose this article to blog about because it relates to my last blog regarding the bank of Canada’s mixed messages of boosting GDP growth while reducing consumer spending.
This ‘careful what you wish for’ article refers to Flaherty and Carney’s attempts to reduce household debt by restricting government insured mortgages. According to this article, home sales are down 15% from the 1 year previous benchmark. Shenfeld reports that for every 10% per year drop in house sales, it will have -1% affect on the GDP growth of the country, given the home sales wealth effect. Furthermore the construction of new homes is expected to slow down with the decreasing home sales, so it is anticipated that this will have a significant negative effect on GDP growth as well.
All this negative GDP growth as a result of curbing consumer’s debt leads me to wonder if the leaders of the country’s finance are doing the right thing. Obviously increased levels of debt due to mortgages can be catastrophic, as seen in the housing bubble in the states, but in my first-year-business-student opinion, i think the the country should focus on increasing exports, and the government should increase spending. Through the multiplier effect, this will increase income in many households, while also boosting GDP. This will have a positive effect on both the GDP growth our leader’s are trying to attain, as well as the household debt to income ratio.