The Boom in Residential Real Estate in Toronto, Vancouver, and Sydney Far Outside the Commodity Producing Regions

These housing market issues become of particular relevance to small- and medium-sized economies under the regime of the 2% inflation standard.

The governments/central banks here face a particular dilemma, especially if there is an attractive narrative which could buoy speculative interest (carry trades) in their national currency. For example, a range of commodity producing and/or emerging market economies have found themselves during the present asset price inflation episode encountering huge demand for their still-positive interest rate monies. That narrative is sometimes rapid growth potential. And a sequence of capital gains on the related currency carry trade imparts positive feedback loops to still more participation in that. . . .

In the great asset price inflation of the present decade, policy-makers in a range of small- or medium-sized countries rejected following the defiant path of hard money. For example, Canada and Australia found their currencies under tremendous upward pressure in the first stage of the US monetary inflation as dollar depreciation and the China monetary boom drove the prices of their key commodity exports towards the sky. The central banks of both Commonwealth countries took the same tack—not allowing interest rates to rise in line with economic expansion fed by commodity export boom so as to contain the strength of their currencies. The result: a boom in residential real estate in the star cities (Sydney, Toronto and Vancouver) far outside the commodity producing regions. A lead narrative featured the flood of newly rich Chinese investors and occupiers of these. And though low, the interest rates had sparkled to a range of income-famished investors in the world outside, including European central banks and other sovereign wealth funds diversifying into these still-positive interest rate monies. Another feature of the monetary policies followed was the build-up of a consumer debt boom, in part taking advantage of the raised value of real estate collateral.

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 140-142.