Toronto housing bubble: inflation or deflation — pick your poison

A new Ipsos poll came out that shows Canadians are pretty much screwed no matter what the next Keynesian move is by the Bank of Canada:

Four in ten (43%) say they are concerned about the impact of rising interest rates on their financial situation, and nearly three in ten (28%) expressed concern that rising interest rates could move them towards bankruptcy.

Overall, four in ten Canadians (42%) don’t feel confident that they will be able to cover all living and family expenses in the next 12 months without going into further debt.

The problem is, once you’re on the debt treadmill, there’s no way off other than a painful faceplant.

Canadians are dependent on low-interest rate loans to fuel their current spending habits rather than producing and saving the wealth required. Debt has the added expectation of returning interest on top of the principal, so debt holders are promising they’ll be that much more productive in the future. Except hardly anyone with a giant mortgage was planning on working harder in the future. They were instead dreaming about the value of their house doing that extra work for them.

The expectation is that interest rates would stay low forever, yet most debt holders don’t realize that if they don’t pay interest on their loans, they will pay interest in a more round-about manner — through inflation.

Rising utility prices, cost of goods and services (and consequently higher absolute amounts of property and sales tax) leave Canadians feeling a bigger pinch if interest rates are kept low. If they have to rely on more debt to finance their current lifestyle, at some point in time they will have to cash out some of their home equity lest they run the debt treadmill for eternity.

With 42% within the next 12 months upping the speed on their treadmills, we should expect to see some capitulation in the housing market.

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