Housing and energy markets both face inflationary pressures but are being dealt with very differently. Neither is working
As anyone who has ever spent time in the kitchen knows, when a pot is boiling over, you do not put a lid on it. You lower the heat.
Adding a cover does nothing to reduce the cause of all the excess bubbles and steam. In fact, increasing the pressure within the vessel generates an even greater eruption of the contents of the pot, this time including a flying lid.
The same logic applies when dealing with inflation. Prices rise when there is excessive demand, insufficient supply or both. Capping prices increases demand since the good is now cheaper and reduces supply as it is now less profitable to produce.
Housing and energy markets both face inflationary pressures but are being dealt with very differently.
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The rising cost of homes in Canada’s major cities has made headlines worldwide. For many Canadians, there seems to be no prospect of their incomes ever being high enough to afford to buy a house or a condo.
Often the blame is laid on banks and mortgage lenders. If only they would require smaller down payments and offer housing loans to those with lower incomes, more Canadians could get homes.
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This does not work. It was tried in the United States at the beginning of this century. Lending standards were dropped to encourage home buying. The resulting mortgages were bundled and sold to investors.
But allowing people to get into debt beyond their means did not work. Too many had to give up their homes because they could not keep up with the payments, and the investors holding the bundled mortgages were left high and dry.
Canada has avoided this trap in the past and continues to maintain lending standards, but we still need to deal with the high cost of housing. Since we want all Canadians to have homes, we cannot reduce demand. But we can and should lower housing prices by increasing the number and types of homes built using zoning changes and other policy means.
Energy prices are now rising at an unforeseen rate around the world. Supply disruptions tied to Russia’s invasion of Ukraine have recently led to major upward pressure. In the longer term, attempts to move away from carbon-based energy sources have reduced investment and production of coal, oil and gas, leading to higher prices since sufficient alternative energy sources are not yet in place.
People need energy. In Europe, where the cost of maintaining and heating a home has risen by thousands of euros, the prospect of a cold dark winter is very real, especially for those with lower income. In Britain, one household in seven is already behind on their utility bills, and the heating season has not yet started. Businesses are also finding that rising energy costs may threaten the viability of their operation. This is a serious problem.
The reflex reaction of political leaders in Britain, France and elsewhere is to cap energy prices. But far from solving the problem, this will only make it worse. Lower prices will encourage people and businesses to use it more freely. Since the problem arises because there is not enough energy to go around, rationing may be required – a solution neither politicians nor the public wants.
We cannot let people freeze in the dark. A better short-term solution is to provide cash subsidies to low-income households and affected businesses. However, since the price of energy is still high, they will be encouraged to use it sparingly by lowering the thermostat a bit and putting on a sweater.
Not quite as effective as cash grants to the needy is lowering the price on the initial modest amount of energy used but keeping the price high for any additional energy purchased, thus limiting demand.
The real solution to high energy prices, however, is to increase supply. In the short- to medium-term, this means carbon-based energy; cleaner alternatives are not yet available, adequate or proven. Still, we can respect the environment now by moving, where possible, away from dirty coal to oil or even cleaner natural gas.
Many countries have realized that, in the face of unaffordable power, now is not yet the time to cut back traditional sources of energy. They are looking at removing limitations on its production.
Canada has done itself and the world a disservice by constraining the production of carbon-based energy, especially relatively clean natural gas. We have hurt ourselves and our friends and allies around the world by not putting in place the infrastructure to deliver this power to where it is desperately needed.
Voices have already been raised to correct this situation. Let up hope that government listens.
Dr. Roslyn Kunin is president of the Vancouver Institute and has been chair of the Vancouver Stock Exchange, WorkSafe BC, and Haida Enterprise Corporation. She has also been on the boards of the Business Development Bank of Canada (BDC) and the National Statistics Council.
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