15 Apr We’re taught that our homes are an asset. And that’s helping keep housing prices high
If you listen to Canadian politicians, the solution to our housing crisis seems to be some combination of immigration reform and a herculean countrywide building effort.
But Paul Kershaw, a public policy professor at the University of British Columbia and founder of the affordability advocacy group Generation Squeeze, says the emphasis on increasing housing supply obscures an issue politicians are less likely to address.
Namely, that we, as a country, have become addicted to ever-rising home prices, largely because we’ve been conditioned to see our homes as financial assets.
“There are multiple things we need to do [to reduce prices], and more supply is one of them,” said Kershaw. But funding announcements for building projects are a “way to organize our concern about the housing system so that we don’t have to … look in the mirror — particularly homeowners who have been homeowners for a long time — and say: ‘How are we entangled?'”
He said the current system incentivizes extracting profit from real estate, rather than prioritizing that everyone has access to affordable shelter.
“We need clarity about what we want from housing,” said Kershaw. “And it has to start with: ‘We don’t want these prices to rise any more.'”
Asked about an Alberta bill that would block the federal government from directly sending funding to cities, Prime Minister Justin Trudeau said provinces who don’t want to solve the housing crisis should “just get out of the way.”
Speculative effect
The trajectory of home prices is well-known to most Canadians. According to the Canadian Real Estate Association, the average home in January 2005 sold for $241,000. By February 2022, it had more than tripled, before easing 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 nine per cent year-over-year in the fourth quarter of this year.
Meanwhile, earnings in Canada have lagged significantly behind housing costs, such that the ownership costs on an average home consume more than 60 per cent of median household income, according to a recent RBC report.
On the face of it, the lack of affordable housing seems like an issue 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’s increasingly investors.
The Bank of Canada found that investors were 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 the percentage of first-time homebuyers dropped to 43 per cent in the first quarter of 2023 from 48 per cent in the same three months in 2020.
“What’s been happening over the last 10 years is that the share of homes bought by first-time buyers has been declining, and their market share has largely been taken over by investors,” 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 purchase a property while maintaining a mortgage on another home.
The central bank has said that “during housing booms, greater demand from investors can add to bidding pressures and intensify price increases.”
Who’s investing?
Early in the COVID-19 pandemic, we saw an uptick 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 only being a problem of speculative activity.”
House-flippers and foreign buyers are often singled out as major drivers of real estate speculation, and various jurisdictions in Canada have introduced legislation to neutralize those kinds of investments.
But Pasalis said those types of buyers aren’t having a major influence on prices. Domestic investors in the low-rise housing market are having a much greater impact.
He said they generally fall into two categories: those who buy directly from developers and those who are moving but decide to hold on to their first residence.
“If they’re upsizing or moving out of the province or country, the first question we get is: ‘Can we keep our current home as a rental?'” said Pasalis.
“They’re not like active investors. They’re just looking at the market, they’re looking at how quickly home prices are going up. Everyone sees housing as a decent investment, so everyone’s mindset is: Why should I sell it?”
It’s one reason there’s less housing supply for first-timers.
The federal government is allowing longer mortgage repayment periods for first-time buyers with insured mortgages on newly built homes. Andrew Chang explores the pros and cons of 30-year amortization vs. 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 out for clarity.
A historic problem
Purchasing a home has a variety of benefits. It gives many people a sense of accomplishment and the security of knowing they can’t be evicted. It also allows them to build up equity, which can help fund renovations, a move to another residence and even retirement.
Many families pass properties on to subsequent generations, which also makes home ownership something of an emotional investment.
Higher prices help existing homeowners tap more home equity and reap greater profits if and when they do decide to sell.
Governments also have an interest in high property values because they translate to larger 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-biggest contributor to Canadian GDP, according to Statistics Canada.
“The housing market encompasses a very large variety of sectors — think about realtors, think about lawyers, think about construction,” said Mok. It’s not just “all the buying and selling, but it’s all the labour 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 home prices as an objective. I don’t think that would be a winner from a political point of view.”
Priced out
Naama Blonder, an architect and urban planner with the Toronto-based firm Smart Density, says part of the problem is a societal obsession with home ownership.
“I think many Canadians think that when we are talking about the affordability crisis, we are talking about their ability to own a house with a backyard.
“For them, ‘We are 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 the model for us,” said Blonder.
“We don’t have politicians who are bold enough to say: ‘It’s more than OK to rent.'”
The upcoming federal budget on Tuesday will undoubtedly contain a number of measures to address the housing shortage. Recent funding announcements have responded to the desire for more rental housing, but the scale of the need is daunting.
In a 2024 report, the Canada Mortgage and Housing Corporation said 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, particularly in the pricier areas of Canada.”
Pasalis said that for all the hand-wringing over housing prices, he doesn’t see there being any political will to rein in investors. And he’s skeptical of the federal government’s recently announced financial incentives to help first-time buyers get into the market.
Putting young people further in debt “is not a way to make housing more affordable,” he said.
Kershaw of Generation Squeeze says a broader “tax shift” is required. He advocates an annual tax on “housing wealth” aimed at the owners of the most valuable 10 per cent of homes in Canada as one way to dampen housing prices, while also raising funds to invest in affordable housing.
“What started happening in B.C. and spread throughout the country is that we weren’t just satisfied with paying off our mortgage to build equity. We’re like: ‘You know what? I want this home price to double, triple, quadruple.'”
When existing homeowners want prices to rise faster than earnings in the local economy “is the moment you want a wealth windfall for those who are owners now that will come, by definition mathematically, at the expense of affordability for those who follow,” Kershaw said.
“That’s the trouble we’ve gotten ourselves into. And if we cannot have that conversation, we will never solve the crisis of housing affordability.”