The average home price in Canada in 2000 was $164,000. As of March 2021, it is $717,000, an increase of 437 percent. Residential mortgage debt is $1.66 trillion, or 85 percent of GDP, and it's growing rapidly. Housing activity now accounts for over 9 percent of GDP, which is some 30 percent higher than the US was at before its bubble popped in 2008. While most of this is being driven by the Metro Vancouver and GTA markets, affordability is an issue across the country. It is getting more and more difficult for younger people to own their own home.
People have been predicting a housing crash in Canada for at least 10 years. Many of them have been Americans who didn't understand some pretty basic things about Canada, such as the fact that we just can't walk away from our mortgage by throwing our keys at the banker. Timing really is everything and lots of money has been lost betting against Canadian housing, and its proxy, the banks. Nevertheless, the current situation is unsustainable and getting worse. One day this party will end and it's unlikely to be a 'soft landing' unless measures are taken now to slowly take the air out of the bubble.
The recent Liberal budget did little to address the issue. They did put $3.8 billion dollars into affordable housing, not exactly chump change but not an amount that will make a difference. Predictably, the Liberal's other move was adding a one percent tax on foreign-owned underused or vacant homes. It's easy and perhaps satisfying for certain people to blame foreigners, but it has nothing to do with reality. While Chinese buyers may have played a role in getting the Vancouver mania started, only 0.56 percent of Vancouver homes are currently owned by foreigners. In fact, only 3 percent of Metro Vancouver homes are owned by non-BC residents.
If they wanted to, there is a whole menu of measures that the Liberals could have taken to curb speculation in housing, such as eliminating interest costs as a tax deduction on investment properties or taxing 100 percent of capital gains if a home (including primary residences) is sold within a certain period of time, say ten years (New Zealand did this recently). Meanwhile, the federal Conservatives are solely focused on increasing supply, which, not coincidentally, is exactly the same thing all the big money developers talk about. But supply isn't really the issue in the GTA, where only 20 percent of the land set aside for development has been built on. As for Metro Vancouver, there isn't much land left, unless someone figures out how to pour a foundation on the surface of the ocean.
None of our politicians, no matter what they say while in opposition or what their ideology is, want to be blamed for a big drop in prices. Many owners seem to think ever-increasing house prices are their birthright and they are loud and organized, aided by all those vested interests who profit from a runaway housing market - developers, agents, contractors, flippers, etc. So what we get from all levels of government and all parties is a lot of scapegoating, posturing and half-measures.
Ottawa should take a hard look at mortgage rules. All home buyers who have less than a 20 percent down payment must purchase default insurance and about half of all such mortgages are insured by the Canada Mortgage and Housing Corp. (CMHC), a government-owned entity. Last June, the CMHC proactively tightened its lending standards . Without getting too much into the technical details, the CMHC reduced the amount of debt you could carry. According to one analysis, these changes likely reduced homebuyers purchasing power by about 11 percent.
The CMHC should continue along this path and incrementally tighten further over time, which will force buyers to get smaller mortgages and thus put gradual downward pressure on housing prices. However, there are two private companies who also insure mortgages, and they don't have to follow the CMHC's policies; in fact they could gain business if they don't. For this to work as intended, the federal government will have to muster up some courage and legislate tighter mortgage policies, and that won't be popular. It's a tough sell to tell people we are making it harder to buy a home now in the hopes of lowering prices in the future.
This isn't all on Ottawa. Consider that another potential fix is increasing the size of the rental market. Various governments have spent lots of money to subsidize the building of rental units, but the track record of these programs is spotty at best. The BC government came up with a better way in 2018 when it passed a bill that would allow municipalities to zone according to tenure. Vancouver could designate areas as rental only, meaning new apartment buildings couldn't be sold off as condos. If enough rental units are created, this will also put some downward pressure on overall prices and make housing more affordable.
The Vancouver city council was initially enthusiastic about the new zoning law and immediately commissioned a study. When that study came back, it estimated that land values would drop 10-30 percent in those zoned areas. The Vancouver real estate community was predictably outraged, conveniently forgetting that land values rose more than 200 percent from 2014-2017. The city quietly chickened out and shelved the whole idea.
There are no quick fixes here. Essentially, the melt up in housing prices has been a massive wealth transfer, where older homeowners have gained at the expense of younger people. It's more than past time people realized they didn't do anything to earn all those gains. The current situation is neither fair nor tenable. We only need to look back to the US in 2008 to see how devastating a housing crash can be. If our politicians only respond to short-term self-interest, it's because we do the same and reward them for it. We can either be adults, and accept some pain now, or be children, and suffer a whole lot more later on.
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