The Bank of Canada’s quantitative easing (QE) policy is exacerbating wealth inequality in the country, as witnessed in the housing market.
“QE can boost wealth by increasing the value of assets, such as the investments Canadians have in their registered retirement savings plans or company pension plans,” Tiff Macklem, governor of the Bank of Canada said in a speech last week. “But, of course, these assets aren’t distributed evenly across society. As a result, QE can widen wealth inequality. We will look closely at the outcomes of QE here and elsewhere and will work to more fully understand its impact on both income and wealth inequality.”
However, the problem does not appear to be QE itself but rather its deployment, which has helped the haves accelerate the pace of their wealth accumulation while the have-nots have been precluded from sharing the riches.
“I think quantitative easing needs to continue but they need to find a way to target it better,” Paul Shelestowsky, a senior wealth advisor with Meridian Credit Union, told CREW. “Quantitative easing is for getting cheap money out there, but all it’s doing is making it easier for wealthy people to access it and making it difficult for people who need to get it, like first-time homebuyers and people trying to refinance.”
The solution, according to Shelestowsky, is to keep certain barriers in place for the wealthy, namely investors, while removing them and even creating incentives for first-time homebuyers. However, the question remains: how can chartered banks be convinced to lend money to riskier borrowers and erect barriers for non-risky ones?
“Tightening credit for investors—a minimum 40% down payment is one way of moving credit from the wealthy to people who need loans. Investors who get loans for 20% and deploy them to buy another property will have trouble if they have to put 40% down. Now maybe those banks instead provide those loans to non-investors and people looking to buy homes to live in, but how do you incent chartered banks to lend to risky people instead of the non-risky people? Is it through extra incentives? Is it through new programs to make sure that people like first-time homebuyers have an equal crack at getting a home?” said Shelestowsky.
“Instead of putting $200,000 down on a $1 million home, now investors have to put down $400,000. This will help first-time buyers instead of investor buyers, but it’s a huge knife’s edge.”
Part of the knife’s edge is raising interest rates, however, that would adversely impact people with existing mortgages from servicing their debts. The Bank of Canada nevertheless expects to raise rates by 2022 instead of 2023, as surmised earlier in the pandemic.
The B-20 mortgage stress test is slated for another increase June 1 after previous changes on January 1, 2018, but perhaps lowering it for first-time homebuyers will help more of them attain homeownership. Another solution might be increasing the first-time homebuyers’ tax credit. Ultimately, the crux of the issue is that housing prices aren’t commensurate to incomes, and ensuring prices remain static is as impossible as suddenly raising everyone’s wages.
“Certainly reducing the stress test, which sounds counterintuitive, for first-time homebuyers would make it easier for them to get in, but not reduce it for everyone else,” said Shelestowsky. “Increasing the stress test for refinances or second homes is another solution, but keeping the focus on first-time homebuyers is the only way to be able to get more people into homes.”
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