Daniel Tencer: Want to avoid U.S.-style populism? Put a lid on house prices
A housing market downturn, even with the economic pain that comes with it, might actually be the better scenario here.
By: Daniel Tencer
The latest housing market numbers from the Canadian Real Estate Association beggar the imagination.
Home sales in Canada were up 76.2 per cent in March from the same month a year ago, to nearly double the usual number. The average selling price is 30.1 per cent per cent higher than a year ago. An average house in Canada now costs more than $700,000.
We are in the midst of an unbridled real estate frenzy. House prices are growing by more than the average annual household income in numerous cities; bidding wars have exploded, and not just in Toronto and Vancouver; the Bank of Canada says it sees a lot of house-flipping these days.
“Policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road,” Bank of Montreal senior economist Robert Kavcic wrote.
“Canada hasn’t had a market overheating of this scope since the late 1980s,” his colleague at RBC, Robert Hogue, added.
If all this ends in a crash, given our current economic and political climate, we can probably expect the Bank of Canada and the federal government to pull out all the stops — and a massive chequebook.
But at this point, a house-price downturn, even with the economic pain that comes with it, might actually be the better scenario here. Worse would be if house prices kept growing, or even stayed for a long time at these levels.
We are at a critical turning point that will determine whether or not Canada will remain a nation of homeowners. Relative to household incomes, house prices in Canada are now the highest on record. Even before the pandemic, a growing share of first-time homebuyers had to depend on money from parents to buy houses. If prices stay at these levels, fewer parents will be able to help their children land a home.
New Zealand economist Shamubeel Eaqub, co-author of “Generation Rent,” is among voices that have been warning for several years that rising house prices threaten to create a new “landed gentry,” where some share of the population inherit homes (or the equity to buy them) from homeowner parents, while everyone else rents from investor owners, shut out of the market due to excessively high down payments.
“The bar is being raised further and further,” Eaqub told me in an interview a few years ago. “At these prices (the housing market) is only open to people who have generational wealth.”
The problem is spreading to small-town and rural Canada. House prices have jumped by 30 to 50 per cent in numerous small cities and towns across Ontario over the past year, as well as in many communities in British Columbia and Atlantic Canada. In Nova Scotia’s South Shore region, the benchmark price is up 60.8 per cent in a year, according to CREA data.
Those parts of the country that were overlooked by the urban 21st century economy at least had the benefit of being eminently affordable. You couldn’t make a fortune, but you didn’t need one to live reasonably well. That has disappeared overnight. The anger is growing palpable online.
“The small town where I live in South Western Ontario has been priced so high, the existing community cannot afford to live here anymore,” one Reddit commenter wrote last month, echoing a sentiment heard again and again. “A lot of friends were saving for homes and now will never be able to purchase in the town they grew up in. Commuters from Toronto living here now, not spending any money in the community, a lot of the local businesses are hurting due to existing customers getting priced out of town.”
If this persists, we can expect to see a young generation of Canadians vent their rage as they realize they have been shut out of the middle-class dream their parents and grandparents took for granted. Immigrants in the cities will discover that, here as in the old country, you will live forever in a small apartment no matter how much you work. The implicit social contract of Canada — work hard and you will achieve a decent level of financial security and independence — will be undermined in the eyes of a great many people.
When that anger arrives on the public scene, it may not arrive in the form of activists holding protests to demand the government build social housing — not in small-town Canada, anyway. The inability to buy a home will be seen as a failure of the system.
Home ownership is a form of social “buy-in.” Those who own real estate share a sense of having a stake in the system, a sense that their well-being is tied to that of broader society. If home ownership fails, that link will be weakened. Elected officials and regulators in Ottawa, the financial experts on Bay Street — those will be the people whose credibility will be undermined. We can expect to see far more people courting radicalism.
For years, historian and journalist Thomas Frank has been arguing that it’s a mistake to view the Donald Trump phenomenon as being primarily about racism and social conservatism, noting that Trump spoke endlessly about free trade in his stump speeches.
“A map of (Trump’s) support may coordinate with racist Google searches, but it coordinates even better with deindustrialization and despair, with the zones of economic misery that 30 years of Washington’s free-market consensus have brought the rest of America,” Frank wrote eight months before Trump was elected.
Frank is no fan of Trump, calling him an “insult clown” and a “gold-plated buffoon” in the same piece above, and the argument that an economic system that failed the middle class led to Trump’s rise should not be overlooked.
Just as automation and the offshoring of jobs to Mexico and China pushed entire American communities into the arms of Donald Trump, so too could the prospect of renting for life from a wealthier neighbour push the next generation of adult Canadians into the arms of a populist leader who throws a Molotov cocktail through the country’s civil institutions.
That’s especially true if the policymakers in Ottawa and the chattering classes in the media dismiss these peoples’ concerns as ignorant, illegitimate or exhibiting some form of privilege.
We need house prices to come down today. Elected officials and the real estate industry are hoping for a “soft landing,” in which house prices stop growing so that household incomes can catch up. But that is no longer an option. By Better Dwelling’s estimates, it would take 19 years for the incomes of 25- to 34-year-olds to catch up with house prices if prices stopped growing today. West of Toronto in supposedly affordable Hamilton, it’s 11 years. And that’s assuming no price growth from here on in.
That’s plenty of time for an angry new generation of voters to throw a wrench into the political and economic system that failed them.
Most of the ideas proposed to address the housing crisis — from building more affordable housing to taxing capital gains on home sales — would take time to have an impact, and how much impact they would have is a matter of heated debate. But house prices are soaring right now, and right now, Canada’s banking regulator, OSFI, could take a lot of heat out of the market by raising the qualifying rate in the mortgage “stress test.”
That would immediately price a lot of people out of the market. And while that might sound cruel to first-time home buyers, it’s actually the more humane way to get people to stop buying houses at unsustainable prices. It doesn’t raise the actual interest rate on mortgages and doesn’t cost people any extra income.
As the market corrects downwards, OSFI could adjust the qualifying rate downwards, allowing those would-be homeowners back into the market — but now at lower prices. I don’t ordinarily condone this sort of economic engineering, but the housing market is already the product of economic manipulation and government policy. And the reality is Canadian real estate is experiencing a market failure.
Let’s get a housing market downturn going right now, before we get a full-on crash — or worse — later down the road.
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Not a quick fix, but it drives me bananas that when we compare housing prices now to those of previous generations, we don't talk about the difference in the houses themselves. It seems impossible to find a new house nowadays that isn't a luxury version: stone counters, hardwood/tile floors, more than 1.5 bathrooms, huge bedrooms, finished basement... Houses in the 60s/70s had NONE of this. You could find a house under 1500 sqft (+ basement) that had 4 bedrooms! (Fits us and a couple kids perfectly). And a semi-detached to save space while maintaining backyard access! Buyers are not given these options now, unless they look for older homes closer to city centres (which raises the price).
This is very much the right take. Unfortunately the political incentives are overwhelmingly and likely irreparably slanted toward the "preserve home equity at all costs" crowd and away from the "we need to solve the problem of housing affordability" crowd. It's going to go very badly for Canada and things will get much worse before they get any better.
What do I mean by worse? Canada (both as individuals and as an economy) is becoming house-poor. Toronto and Vancouver are already there, everyone else is now being dragged along for the ride. Individual and household choices will increasingly fixate on controlling housing costs and servicing debt - rather than spending money to support the local/national economy, maximizing opportunity, taking risks for career growth, improving day-to-day quality of life, or tolerating expanded investment in communities.
Not only that: housing is very clearly leading to a novel form of Dutch Disease. Why would anyone invest in starting or funding a business, or really anything that would improve the country's productivity, when they can make a quicker, easier, and more certain buck "investing" in housing instead?
The people who decide elections are, for now, overwhelmingly homeowners. In part they're putting their home equity first regardless of social cost. But really, Canada's governments at every level have been asking for this for a while. They're asleep at the wheel and deeply unserious in their attempts to improve the housing situation. Governments have shoved the most electorally significant set of Canadians into a place where their only choice is to protect their own housing wealth if they have it or go hopelessly all-in on housing if they don't.
I'm afraid the major Canadian parties have neither the will nor the political stability needed for credible action on housing. There is not a chance in the world any minority government will take action seen to be improving the cost of housing. They have been and will continue to focus on being seen to take action, rather than actually doing anything, and we're all going to suffer for it.
My fear is we'll only see credible improvement after the trough of a national economic calamity.