IM-Masson_2024_0115.pub

Masson To: Canadian Housing Watchers Date: January 15, 2024 Re: Goldilocks Interest Rates Needed to Help Housing Affordability In the current debate about how to make housing affordable in Canada, there is a curious omission: The role of monetary policy, which was excessively loose in creating the problem and can be more responsibly applied to solve it. [...] The global financial crisis of 2008-09 led central banks around the world to reduce interest rates to historically low levels, which made perfect sense during the crisis, but then to keep them there for more than a decade, which sowed the seeds of our current affordability crisis. [...] Finally, as the Bank of Canada ponders when to start its rate cuts, it is crucial to avoid a lost decade like the 1970s by preventing a return of the post-2008 era of unsustainably low rates. [...] The target needs to be the Goldilocks interest rate: high enough for a time to bring house prices down but then not so low as to enable inflation to rise from the dead again. [...] Paul Masson, who has worked at the Bank of Canada, the OECD and the IMF, is a research fellow at the C.