Housing’s two balance sheets

The borrower’s payment and the owner’s wealth

Cheaper housing lowers the barrier facing a prospective buyer while reducing an existing owner’s wealth. I start Canada’s housing debate with those two balance sheets. Carolyn Rogers’ speech on 1 October puts the squeeze from shelter costs on consumption and saving alongside the weakness in spending that falling house prices can produce. For a household, a home provides both shelter and wealth. A policy that lowers its price can therefore touch aggregate demand in opposing directions through those two functions.^[1]

Rogers’ lending figure extends that tension to banks: roughly half of bank lending is residential, and mortgages are households’ largest borrowing category. Rate changes therefore touch a broad stream of payments. The approximately 50% rise in house prices during two pandemic years also illustrates how far the wealth side can move. These aggregates distribute neither debt nor asset gains evenly across households. Renters, prospective buyers and existing borrowers occupy different positions in the same housing system.^[1]

Two paths from a rate cut

The strongest case for a rate cut is straightforward: it lowers financing costs, eases mortgage access and gives a borrower more room for other spending. Rogers identifies the constraint as the number of homes available against that extra purchasing power. With supply limited, cheaper credit can raise prices and erode the affordability gain. My inference is that monthly payments and the purchase price must be considered together when assessing cheaper finance. An expansion in permits, infrastructure and housing capacity provides a competing channel through which the same financing change could produce a different result.^[1]

Rate increases also have two directions. Rogers explains that expensive credit can slow aggregate demand while increasing mortgage payments. One policy rate for the whole economy narrows the central bank’s ability to fine-tune a housing problem. Zoning and building permits belong to other institutions. I take that division of responsibility as a reason to consider price stability and housing capacity together. Asking the general interest rate to repair different borrowers’ payment schedules and a particular city’s supply barriers in a single move loads too much onto one instrument.^[1]

The measured expense and the burden carried

That tension also enters the price statistics. Canadian homeowners’ shelter expenses in consumer inflation include mortgage interest, property taxes, insurance and maintenance. The home’s purchase price is treated as an asset price. A rate increase can therefore temporarily lift the interest-expense component while restraining wider demand. Rogers explains that removing this component would exclude a genuine household expense and that alternative measures have trade-offs too. Measuring the payment burden and measuring the asset’s market value answer different questions.^[1]

For me, the useful outcome is to keep clear which balance sheet and payment stream a housing-affordability policy works through. Rogers’ defense of low and stable inflation concerns households’ general purchasing power. Expanding housing supply concerns capacity in a particular market. Looking together at credit costs, an existing borrower’s budget and a prospective buyer’s price makes it harder to derive one affordability result for everyone from a single direction in interest rates. Good policy recognizes these opposing channels and accounts for which household carries the burden.^[1]