Commentary
Bank of Montreal economists Doug Porter and Robert Kavcic, in an article titled “Catch-’23: Canada’s Affordability Conundrum,” go into detail about a difficult issue which has been a concern for years, especially in urban and suburban areas.
There seems to be no easy way out of this situation despite the assurances of politicians. Single-family housing in Canada is simply too expensive relative to the income of the majority of residents. Recent interest rate increases have further exacerbated this problem to the point of an economic and social crisis. Porter and Kavcic point out the naiveté of the mainstream explanation that this is just a supply problem.
The simple solution of the left is to merely put up cheap government-funded high-density apartment buildings with yet more debt. They dream of the mythical “15-minute city.” In reality, they will end up with 1970s U.S.-style housing projects which are miserable and unlivable. The right, for their part, believe in allowing the private sector to do its magic. End restrictive regulations and, in Toronto’s case, the Green Belt, and entrepreneurs will create supply and reduce prices.However, both are not feasible. Population growth is too strong in cities like Toronto, Vancouver, and others relative to feasible supply thanks to immigration and Canadians from other parts of the country seeking opportunities. Although prices have come down, the cost of carrying a mortgage along with taxes, maintenance, and insurance is still near 30-year highs relative to income. Only a price correction will improve affordability. Homeowners cannot rely on rates returning to multi-generational lows, as Bank of Canada Governor Tiff Macklem has indicated. Canadians certainly will not enjoy any miraculous increase in average income anytime soon. Even if that happened, speculation might drive prices even higher.
Note that income growth has slowed over the decades, but house prices have soared. The Canadian situation has been fuelled by artificially low interest rates, supply suppression (mostly as a result of misguided environmental concerns), and high demand due to government-induced but unsustainable population growth.
As a result of increasing mortgage costs, homeowners have elected to lengthen the maturity date of their debt instead of paying much higher monthly costs or selling their homes. Although understandable, this a fool’s errand. It is reminiscent of Japan in the 1980s where the idea of 100-year mortgages was floated, and we all know how that ended. This strategy increases interest payments and therefore lessens the disposable income of the homeowner. This is happening while the underlying asset is set to drop in value. Essentially this is a reverse wealth effect: net worth and disposable income declining at the same time.
Canadian single-family home prices are too high. They are higher than those in the United States, despite the fact that average household income in America at the end of 2021 was about 37 percent higher than Canada. According to BMO’s data, home prices in Canada have outperformed the United States by approximately 90 percent. It appears that Canada’s larger population growth more than offsets the fact our economy lags behind that of our neighbour to the south. To put this situation into context, the ratio of average house price to income is 6.2 in the United States and 10.5 in Canada. Therefore, Canadian home prices are almost 70 percent higher than the United States in terms of income.
Politicians, economists, and pundits can talk all they want about demand, but “demand” in economics is different from desires and wants. There is a “demand” for four-bedroom homes in developing nations, but people there simply do not have the economic wherewithal to achieve that dream. For many young Canadians, likewise, owning a real home, which was the norm for previous generations, is currently improbable.
However, relief is on the way. As economist Thomas Sowell stated: “There are no solutions, only trade-offs.” Sooner or later, there will be a housing crash in Canada and prices will become more affordable—although times will be very rough for homeowners with large mortgages and stagnant incomes. All bubbles eventually pop.
