© HeatherTaweel/The Guardian
Jim Sentance, associate professor of economics at UPEI, said it may be difficult for Canada to continue the route of monetary policy since the U.S. Federal Reserve raised its interest rates for the first time since 2006.
P.E.I., housing prices increase annually by three to four per cent
Canada's Atlantic and Pacific Coast are more than just at opposite ends of the country - they are worlds apart when it comes to their real estate markets.
On P.E.I., house prices increase annually by three to four per cent with the average price around $160,000.
In Greater Vancouver, the percentage number spiked by 23.6 per cent in 2015 with the average house price around $1.6 million. Meanwhile, in the Greater Toronto Area that number went up by 11.6 per cent for 2015 with the average house price around $806,700.
However, a UPEI professor thinks these high prices are in conjunction with supply and demand in those cities' housing market.
"Prices seem ridiculous, but there is limited space and there is a lot of people who want houses," said Jim Sentance, associate professor of economics at UPEI.
These prices in metropolitan areas have led the Bank of Canada to outline two key vulnerabilities in its financial system review, including the elevated household debt and imbalances in the housing market.
In its most recent financial system review, it notes that most of these indebted households are in larger cities like Toronto and Vancouver, which represent one-third of the value of housing stock and mortgage debt in the country.
That doesn't mean Islanders wouldn't feel the impact if those concentrated pockets were to take a nosedive.
If a quick correction in these markets were to occur, it could have an impact on the whole Canadian economy and its financial sector, read the review.
The central bank believes the system is resilient to these areas of weakness so long as there is no severe recession or widespread unemployment.
To help cool down these markets, the Canada Mortgage and Housing Corporation has tightened its rules and now requires a 10 per cent down payment of mortgages between $500,000 and $1 million.
"That is really going to address what is going on in Toronto and Vancouver," said Sentance.
Wayne Ellis, president of the P.E.I. Real Estate Association, said this is not an overextended market, like in larger metropolitan cities, which is why P.E.I. has an appeal to many people out of province.
"Our housing prices are so very reasonable compared to the rest of Canada."
Sentance said the U.S. Federal Reserve raising its interest rates makes it difficult for Canada to continue the route of monetary policy.
Many analysts and policy people would like to see interest rates be a little higher than they are currently in this country, he said.
"Interest rates are so low that people are able to afford such large mortgages, and I think that has been part of the problem," said Sentance. "It's an incentive, it's an encouragement for people to borrow more."
Sentance said lowering interest rates further would also put more downward pressure on our dollar.
"It's helpful for exports, but not really helpful for our purchasing power and will probably lead to more inflation because imported goods are going to cost more."
Sentance said this underscores the importance of putting more focus on fiscal policy instead of monetary policy.
Government is currently going that route with the promise to run a deficit to stimulate the economy.
"The size of the deficits they are talking about are probably not huge enough to have a really large effect on things," said Sentance. "I think it will be helpful, it will be more helpful then further cutbacks to try and balance the budget would be."