Housing is more a necessity than a luxury; it is more an essential expenditure than an investment option.

Houses in Canada are becoming increasingly unaffordable. The trend has defied all predictions. Back in May 2020, Canada Mortgage and Housing Corporation (CMHC) predicted a double-digit fall in average house prices over the next year in the wake of pandemic-induced shutdowns that resulted in millions of job losses across the country. Back then, the economy had contracted by 42 per cent on an annualized rate in the second quarter of 2020.

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It is June 2021 and things are poles apart from CMHC’s forecast. In April 2021, the average house price in Canada was $696,000, a whopping 41.9 per cent increase over the average price in April 2020.

Housing sector inflation vs overall inflation

Inflation is an indispensable part of a growing economy. Now that the country’s economic growth is in positive territory, inflation was inevitable. In April this year, the Consumer Price Index (CPI) grew by 3.4 per cent, but much of it can be attributed to subdued prices last year. For example, gasoline and natural gas prices rose by over 30 per cent, which is understandable as the shuttered economy in 2020 did not use much energy. But the 41.9 per cent increase in housing prices during the pandemic has baffled analysts.

The Bank of Canada’s latest report on financial vulnerabilities highlights how the volatile housing market is a major cause of concern. Record-low policy rates have allowed people to accumulate high mortgage debt, and this high household indebtedness is one of the most significant liabilities faced by the country. In a recent news conference, central bank governor Tiff Macklem stressed how indebtedness could eventually lead to a dip in house prices, besides impacting household income and the overall economy.

The sector’s unprecedented price rise threatens to deepen inequality. In her latest statement on the housing market, Finance Minister Chrystia Freeland mentioned how rising prices are squeezing the country’s middle class, and why it is essential to address the volatility to make houses affordable for young families and new Canadians.

The unaffordability element in the Canadian housing market is highlighted further in the new global ranking compiled by the Frontier Centre for Public Policy. Vancouver was second in the list of severely unaffordable housing markets in the third quarter of 2020. Hong Kong topped the list, while Toronto occupied the fifth position. It shines a spotlight on how the large influx of buyers in suburban areas is further deteriorating many low-income families with severely adverse impacts on their living standards.

This imbalance allowing small wealthy section access to the housing market has many Canadians venting anger on online forums. With one of the highest ownership rates in the developed world, Canada always had broad sentiments on house ownership, which is viewed as a legitimate entry into the well-off class. However, last year changed the dynamics as bids by commoners were beaten by richer bidders.

Near term course corrections to rein in prices

Near-zero policy interest rates play a significant role in this. Many experts believe that the Bank of Canada may unwillingly shed its accommodative stance to rein in the housing market. However, the central bank seems to have very little elbow room. The unemployment rate in Canada rose to 8.1 per cent in April 2021 from 7.5 per cent a month earlier. The biggest worry, says Carla Qualtrough, the employment minister, is the unemployment rate among Canadian youth that has gone past 16 per cent in April. Amid such high joblessness, the exorbitant hike in house prices is adding to the vulnerabilities of Canadian youth.

Recent measures indicate the government and other agencies are willing to step in. For example, a little while after the news conference by the central bank’s governor highlighting housing sector imbalances, the Office of the Superintendent of Financial Institutions (OSFI) announced new stress tests for eligibility to loans. As of June 1, borrowers are required to prove their financial capacity to pay a minimum of 5.25 per cent interest rate on a loan, irrespective of whether the lender is willing to charge lesser interest.

The stress test will further dent the prospects of young families to qualify for a mortgage, reducing at least some pressure on the demand side. It should be complemented by other measures like the 2017 decision to earmark $70 billion for the National Housing Strategy for the construction of affordable homes. The supply-side crunch in the Canadian real estate market demands urgent actions.

A 41.9 per cent year-on-year increase in average house prices threatens Canada’s position as one of the wealthiest countries in the world. In addition, the central bank’s warning that indebtedness owing to housing can lead to extreme financial vulnerability, eventually reducing household consumption due to large negative wealth effect, is an area of concern. The growing inequality calls for a course correction in Canada’s housing market.

1 COMMENT

  1. While the article is interesting, it basically cites a set of facts to support a predetermined conclusion. All the article really said is that the government has been consistently wrong about its predictions and has stayed true to form in its decades-long failure to arrest the housing pandemic.

    A report on the housing crisis read to the Ontario Legislature in — 1997 — describes almost exactly the same housing crisis situation we have today, except that today’s situation might be considered direr.

    Aside from the simple issue of supply versus demand, there are myriad influences driving up the cost of housing that far outweigh any consequence from unemployment ot more expensive financing. For example, more people are leaving the construction industry than entering it so housing sector labour costs are rising. Lumber and property insurance costs literally doubled during the past year. Ontario electricity was quietly increased by 55% by the provincial government in Nov 2019 and another 5% by early 2021. The legislation surrounding residential rental tenancy is brutal and dissuasive for investors to get involved in. These, and many other factors, are not being considered by federal and provincial claptrap policies and simplistic short-sight band aids.

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