Commentary
The housing crisis in Canada is apparent to everyone in this nation. It has become a major topic of conversation despite the federal government’s effort to deflect the conversation towards climate change.
Major banks are feeling the stress as their net interest margins are under pressure as they work with homeowners to restructure their mortgages. Many homeowners cannot hope to meet payments at higher rates. Make no mistake about this: What is happening in the housing market is a massive debt restructuring that has only just begun and will dramatically reduce the wealth of millions of Canadians.
The mainstream media, politicians, and ordinary citizens talk about the housing affordability crisis for good reason. Given the incomes of Canadians, most people seeking new homes have been eliminated from the market, especially in some areas.
Different areas have this problem to various degrees. The corporate media, most of which are located in and/or work in a five-kilometre radius of the CBC building in downtown Toronto, have a myopic view that the nation’s largest city constitutes Canada.
However, when we examine other parts of the country, there are still very good places to live where life may be expensive but is feasible. Given the trend towards remote work, many should consider moving to more affordable areas. Things will not get better anytime soon. When more expensive housing markets crash, home prices will decline and the local economy will incur a severe economic downturn. Homes may be more affordable to purchase but fewer people will be able to afford to buy things.
The middle class, upper middle class, and even most of the upper class have been priced out of the market in places like Toronto and Vancouver. It is also worth noting that the quality of life has declined dramatically in those cities.
The average single family detached home price in Toronto is about $1.3 million. The average household income is $84,000; a ratio of about 16 times. If a person was buying a typical home with a 10 percent down payment their monthly payment would be over $7,500 a month. (Good luck coming up with $130,000 for a down payment on a pre-tax income of $84,000). Using the standard metric of housing costs being no more than 35 percent of income, a household would have to make $250,000 to afford an average single-family home. The Toronto market is broken and has become unattainable for young families not born into wealthy families.
In contrast with Toronto or Vancouver, the average home price in Calgary is under $700,000, or slightly over half of the Toronto average. Average family income in Calgary is $118,000—a whopping 40 percent higher than Canada’s largest city.
Calgary provides opportunity and a better quality of life. The economy is dependent on energy, but less so than in the late 1970s and early 1980s when our current prime minister’s father took it upon himself to destroy the Albertan economy by implementing the disastrous National Energy Program. Remote workers, especially, are insulated from energy volatility. Alberta should do relatively well despite the best efforts of central Canadian elitists to impoverish it.
Cities like Winnipeg, Saskatoon, and many other places in the West, and the Atlantic provinces are better value than Toronto and Vancouver. In Montreal, average prices are about $500,000. Montreal is charming if you can put up with the language question, poor economy, and troublesome infrastructure.
Government got us into this trouble, and we should avoid our Canadian proclivity to demand the government save us. They cannot, and they do not have the courage to fix this without pain. They also seem reluctant to give up their maladaptive economic assumptions.
Given the lagging productivity of the economy, incomes will not rise soon in real terms to make homes affordable in the overheated markets. It is highly improbable home prices will remain the same in nominal terms at the same time inflation increases nominal incomes to the point of renewed affordability. If that happened, Canada would have hyper-inflation, which would be catastrophic.
There is not enough time or money to build our way out of this, and Ontario, as an example, does not have the wisdom to get rid of counterproductive regulations on the Greenbelt, which prevents building. The million plus immigrants who have recently arrived are not going to all leave. They do not have the income to prop up the market. The result is inevitable. Home prices will fall, and in expensive areas, the fall will be stomach-churning. People will see their net worth collapse since a high proportion of the wealth of individual Canadians is in their homes. This will be the biggest loss of wealth since the Great Depression.
I expect a fall in prices of anywhere from 20 percent to 40 percent. Some Canadian homeowners will suffer, and a few may lose their homes. This is especially true of recent purchasers. However, for homeowners with large equity positions, the effect will be more psychological than financial.
The wealth illusion of the last few years will end. Recent prices are as unsustainable as Japan in 1990. Hopefully, Canada will not face a generation of decline.
