Achi news desk-
If you listen to Canadian politicians, the answer to our housing crisis seems to be some combination of immigration reform and a herculean nationwide construction effort.
But Paul Kershaw, professor of public policy at the University of British Columbia and founder of the affordability advocacy group A Generation Crisissays that the emphasis on increasing the housing supply hides an issue that politicians are less likely to address.
Namely, that we, as a country, have become addicted to house prices that are continually rising, mainly because we have been conditioned to see our homes as financial assets.
“There are several things we need to do [to reduce prices], and more supply is one of them,” Kershaw said. But funding announcements for construction projects is “a way to organize our concern about the housing system so that we don’t have to … look in the mirror – especially homeowners who have been homeowners for a long time – and say: ‘How are we getting stuck?'”
He said that the current system encourages the extraction of profit from real estate, rather than prioritizing that everyone has access to affordable shelter.
“We need clarity about what we want from housing,” Kershaw said. “And it has to start with: ‘We don’t want these prices to go up any more.'”
Asked about an Alberta bill that would block the federal government from sending funding directly to cities, Prime Minister Justin Trudeau said provinces that don’t want to solve the housing crisis should “get out of the way.”
Speculative effect
The trajectory of house prices is familiar to most Canadians. According to the Canadian Association of Real Estate, the average home sold in January 2005 for $241,000. By February 2022, it had more than tripled, before decreasing somewhat to $719,400 in February 2024.
On Friday, Royal LePage released a forecast that suggested the aggregate price of a home in Canada will increase by nine percent year over year in the fourth quarter of this year.
Meanwhile, earnings in Canada have lagged significantly behind housing costs, so that the cost of owning an average home consumes more than 60 percent of median household income, according to a recent RBC report.
On the surface, the lack of affordable housing appears to be a matter of supply — just build more to meet demand and prices will come down.
But part of the problem is the source of that demand: it is increasingly investors.
The Bank of Canada found that investors are responsible for 30 per cent of home purchases in the first three months of 2023. That’s up from 28 per cent in the same period in 2022 and 22 per cent in the same period in 2020.
That report also found that the percentage of first-time home buyers fell to 43 per cent in the first quarter of 2023 from 48 per cent in the same three months in 2020.
“What has been happening over the last 10 years is that the proportion of homes bought by first-time buyers has been falling, and their market share has largely been taken over by investors,” he said. John Pasalis, president of Toronto-based Realosophy Realty.
The Bank of Canada’s definition of an investor is a buyer who took out a mortgage to buy a property while maintaining a mortgage on another home.
The central bank has said that “during a housing boom, increased investor demand can add to bidding pressure and intensify price increases.”
Who invests?
Early in the COVID-19 pandemic, we saw an increase in people buying second properties.
Robert Hogue, assistant chief economist at RBC, says a combination of low interest rates at the time and many people sitting on large savings “encouraged speculative activity.”
But he doesn’t see current high prices “as just a problem of speculative activity.”
House flippers and foreign buyers are often identified as the main drivers of real estate speculation, and various jurisdictions in Canada have introduced legislation to neutralize those types of investments.
But Pasalis said those types of buyers don’t have a big influence on prices. Domestic investors in the depressed housing market have a much bigger impact.
He said they generally fall into two categories: those who buy direct from developers and those who move but decide to hold on to their first residence.
“If they’re upsizing or moving out of state or country, the first question we get is: ‘Can we keep our current home as a rental?'” Pasalis said.
“They’re not like active investors. They’re just looking at the market, they’re looking at how fast house prices are going up. Everyone sees housing as a worthy investment, so everyone’s mindset is: Why should I sell it?”
It is one reason that there is less supply of housing for new workers.
The federal government allows longer mortgage repayment periods for first-time buyers with insured mortgages on newly built homes. Andrew Chang examines the pros and cons of 30-year amortization versus the previous 25-year rule for prospective homeowners. Correction: At 1:38 in this video, we miscalculated that 20% of $500,000 is $125,000. It’s $100,000. It has been edited for clarity.
A historical problem
There are a variety of benefits to buying a home. It gives many people a sense of achievement and security knowing they cannot be evicted. It also allows them to build up equity, which can help fund renovations, relocation and even retirement.
Many families pass down property to subsequent generations, which also makes home ownership something of an emotional investment.
Higher prices help existing homeowners tap into more home equity and get more profit if and when they decide to sell.
Governments are also interested in high property values because they translate to greater tax revenue, said Diana Mok, associate professor of real estate at the Lang School of Business and Economics at the University of Guelph in southern Ontario.
Not only that, but real estate is the single largest contributor to Canada’s GDP, according to Statistics Canada.
“The housing market encompasses a very large variety of sectors – think realtors, think lawyers, think construction,” says Mok. Not just “all the buying and selling, but all the labor that contributes to the economy.”
While Prime Minister Justin Trudeau has publicly lamented high prices, Hogue said he can’t imagine “any government that would intervene to lower housing prices as an objective. I don’t think that would be a winner from a political point of view.”
Priced
Naama Blonder, an architect and urban planner with Toronto-based firm Smart Density, says part of the problem is a societal obsession with home ownership.
“I think a lot of Canadians think that when we talk about the affordability crisis, we’re talking about their ability to own a house with a backyard.
“For them, ‘We have been priced out of owning a house, therefore, we have an affordability crisis that we need to solve.’ I have news for you … what worked for our parents is not going to be a model for us,” said Blonder.
“We don’t have politicians who are bold enough to say: ‘It’s more than okay to rent.'”
The federal budget due on Tuesday will undoubtedly contain a number of measures to tackle the housing shortage. Recent funding announcements have responded to the desire for more rental housing, but the scale of the need is alarming.
In a 2024 report, the Canada Mortgage and Housing Corporation said that despite a record number of projects started between 2021 and 2023, “this increase will not meet the growing demand. As a result, rental markets will remain tight, especially in Canada’s priciest areas.”
Pasalis said he doesn’t see any political will to rein in investors despite all the controversy surrounding house prices. And he is skeptical of the federal government’s recently announced financial incentives to help first-time buyers enter the market.
Putting young people further into debt “is not a way to make housing more affordable,” he said.
Kershaw of Generation Squeeze says a broader “tax shift” is needed. He advocates an annual tax on “housing wealth” aimed at owners of the most valuable 10 percent of homes in Canada as one way to reduce housing prices, while also raising money to invest in affordable housing.
“What started happening in BC and spread across the country is that we weren’t satisfied with just paying off our mortgage to build equity. We’re like: ‘You know what? I want this home price to double, triple, quadruple.’”
When existing home owners want prices to rise faster than returns in the local economy “is the moment you want a wealth windfall for those who own it now which, by mathematical definition, comes at the expense of affordability to those who follow,” Kershaw said. .
“That’s the trouble we’ve gotten ourselves into. And if we can’t have that conversation, we will never solve the housing affordability crisis.”
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