Last Monday, the IMF improved the outlook for the Canadian Economy [1] – which will be welcome news after a sluggish period since late 2014. The IMF projects that Canada’s economy will grow by 1.9% and 2.0% respectively in 2017 and 2018.

Canada is also expected to outperform every G7 country except for the United States. Most of the adjustments are a result of the 2016 US election – and the IMF believes Canada will come out of a Trump presidency relatively fine, though it is still early to tell.

President Trump’s presence dominates most of the report, as shown by Mexico’s growth projection – it’s economy is expected to slow to a 1.7% increase.

For advanced economies, in general, the IMF suggested policies that fight the low inflation that plagues negative output countries, and to enact policies that will help long-term potential output. For example, tax reform and the strengthening of safety nets.

A lot of the positivity for the Canadian Economy comes from the stabilization of commodity pricing, and general positivity for all advanced economies.

However, it is far from all good news for the Canadian economy. The loonie looks to be in for a rough year [2]. As the US appears ready to ready to hike interest rates, the loonie will likely fall – as you will have learned from your introductory Macroeconomics courses.

Then, there is the issue of President Trump’s unpredictable policies. These concerns are further enforced in the IMF report, saying “[…]there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications.” If President Trump decides to govern with a protectionist agenda, it will undoubtedly be bad news for Canada.

Overall, there is enough evidence to be cautiously optimistic for the Canadian economy.

One of Canada’s biggest news stories in 2016

The original stance from the provincial governments was to do nothing. This was clearly not a politically stable position for them to take, as many families were completely priced out of the market – especially first-time buyers.

The increase in prices can be explained by a few factors. First, foreign investment has been increasing greatly. Further, the population is increasing in both cities while the size of households is going down. In addition, mortgage rates has been low which making borrowing much easier. All of these factors creates a much greater demand. Specifically in Vancouver, supply is naturally restricted as it is surrounded by sea and mountains. In fact, it is the most densely populated city in Canada, and fourth in North America. This means that if demand increases, supply cannot increase naturally increase with it, and would raise prices.

Economics 101 explains that pricing is determined by two things: supply and demand. Thus, there are two ways to approach this problem.

The BC government has decided to approach this problem from the demand side. BC introduced a 15% tax on foreign buyers. Theoretically, this should shift the demand curve to the left, therefore reduce the price of housing. This, roughly, has worked in practice. Foreign investment has shrunk in the past few months in Metro Vancouver, though it is still too early to tell how effective the policy has been to discourage foreign buyer speculation.

In addition, the provincial governments in BC and Ontario have decided to give help to first-time home buyers. Basic economics would suggest this is a poor idea. A tax rebate would shift the demand curve to the right, and increase housing prices, theoretically.

Meanwhile, on the supply side, Economics 101 would tell us that building more homes would also help to solve this problem. However, neither BC nor Ontario have decided to approach the problem this way. One way to do this, is to make building homes easier as current laws make it difficult to build homes easily. For example, current regulations in Ontario result in long and uncertain building permits, effectively slowing the building of new homes. In addition, costly fees and opposition by local citizens slows construction. Building more homes and loosening regulations would shift the supply curve to the right, and decrease the equilibrium price.

Clearly, housing prices will be a hot-button topic in 2017 and beyond – and will impact you throughout your lifetime. It goes to show that even the complexities of the evolution of housing prices can be understood applying basic economics.