Front Burner - A wild housing market: what’s the solution?

Episode Date: June 11, 2021

As Canada’s housing prices continue to rise we take a closer look at the political and economic tools that could be used to help cool it down with the help of Bloomberg News reporter, Ari Altstedter.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Pusso. This week, the Royal Bank of Canada announced they think that Canada's housing market is going to be even hotter this coming year than they actually expected it was going to be. They're predicting a 13% rise. That's on top of an already stratospheric 30% rise in housing prices this last year. It's totally bonkers. We did a whole episode a few months back about why it's all gone so insane.

Low interest rates because of the pandemic, FOMO. Since then, we've learned there are huge transfers of generational wealth flowing from parents to kids. Anyways, there are growing calls for policymakers to really step in here. And while this affects every level of government, federally, as we head into an impending election, the unaffordability of housing is becoming something that we're hearing politicians talk more and more about. So today, Bloomberg Canada's real estate reporter Ari Altstetter is back to pick up sort of where we left off. What are the political solutions to this madness? And is anyone really fighting for the non-homeowners in this equation? Hi, Ari. Welcome back.

Hey, Jamie. Thanks for having me. It is great to have you. So, look, since the last time we spoke, which I believe is right around the beginning of April, the housing market, it hasn't really let up, hey? Like, it was the busiest April ever. Prices have kept climbing. The busiest April ever, prices have kept climbing. There have been more warnings from experts, from economists, that this sort of runaway housing train is not healthy, is unsustainable. And I don't want this to sound like a super obvious question, but can you take me through

a few of the reasons why people say house prices can't continue to rise like this, why this is so concerning? Well, right. to rise like this, why this is so concerning. Well right, the biggest problem that people are talking about is affordability, is how people who don't already own a home can afford one. It's really disheartening. 29-year-old Patty Tracy has been house hunting for nearly two years. We were looking in the houses in Guelph a year ago were $400,000, $500,000.

Now they're like $600,000 to $800,000 a year later. How does that happen? And that's a really important issue in Canada, where traditionally, home ownership has always been, you know, the surest route to middle class financial stability. Ownership of a single-family detached home with a white picket fence in the backyard is also considered in much of Canada the best way to raise a family. So these issues become really personal for people, the issue of whether or not you can afford a home.

And I think that's the main criticism people have, the main worry people have. I've also heard like, maybe people won't want to move here. Right? Yeah. I mean, I mean, I've heard tales of, of people saying they're going to leave Canada because of the housing situation. I'm not sure how serious those people are when they complain about it on Twitter. But, but, you know, I guess it's being talked about. Another sort of issue with continued rise in housing prices, and particularly at the speed that we've seen, is broader financial

stability for the whole country. I mean, we all remember the 2008 housing crash and ensuing recession in the United States. It caused the Great Recession, which was a global event. And that happened because of a crash in the housing market that just rocked the rest of the economy. Right. And I know that this is something the Bank of Canada is concerned about, too, the amount of debt that individuals are taking on. Well, if you're in the market for a new home, you might want to rethink that purchase, because the Bank of Canada governor had this warning for Canadians today on home prices. Canadians need to be prudent in taking on new

debt. It's important to understand that the recent rapid increases in home prices are not normal. Even without a shock, some of the factors that cause prices to rise fast could reverse later, and that could leave some households with less equity in their homes. This is something that you and I sort of talked about the last time that you were here, but still, I'm only hearing calls about cooling or slowing what's happening. So then Ari, why couldn't house prices go down in the context of them rising 30% this year? Like, why would it be such a bad thing for them to go down 10 or 20%? For people who don't have a house, it doesn't sound so bad. I suppose for people who do have a house, they don't want to lose those gains.

I think the question that policymakers that sort of coming up in politics is, is should they go down? And I guess that sort of depends on where your interest lies. And, you know, so far, the Trudeau government seems to be indicating that they think they shouldn't go down. And, you know, the reasons for that could be financial stability of the broader economy, that maybe those house prices go down. And some of the people who were really stretching over the last year to buy a house, maybe they run into trouble and they're suddenly underwater with house prices go down. And, you know, that could cause a broader problem maybe down the road for the housing market in general. That could be a worry that they have cited. And also, you know, people's financial planning depends on, you know, people who have their houses for longer term,

their financial planning for retirement, older people maybe is tied up in the value of their house. And maybe they might have to change those plans if house prices go down. And I mean, politically, it might be worth noting here, like there is no shortage of stories of angry homeowners who make a lot of noise when maybe like their, even like their property taxes go up, even though they have multimillion dollar houses, right? So like, there's there's like some political considerations here, too, I would imagine. Oh, totally. I think I mean, you've hit on it, that may be at heart why, you know, the government eyeing a possible election is so wary of letting home prices fall just a little bit,

because homeowners are a huge voting block. Because they skew older, they vote reliably. And that is kind of a third rail that no politician wants to touch, particularly when they're heading into an election, potentially. Which I'm sure for all the non-homeowners listening right now who have not made hundreds of thousands of dollars in this market or millions of dollars, that's probably frustrating to hear. So RBC said this week that policymakers had done little to cool the market thus far. What is that little? Ari, rhyme a few things off for me. What has been done? Sure. I mean, the most recent things have been from the federal level, which is increasing the mortgage eligibility stress test a little bit. So knocking up the qualification rate, which is a little bit harder to qualify

for a mortgage, you need to show a little bit more income, a little bit more money down in order to qualify. And then in the most recent budget, the Trudeau government also announced a tax on foreign non-resident homeowners, as well as some new funding for affordable housing across the country. And do you think that any of that can move the needle here? I mean, the consensus among economists who've studied this and have been putting out papers recently sort of evaluating these moves and who I've talked to is that probably not. They're probably not really enough in the face of the huge forces of supply and demand that are fundamentally driving the market. Most people kind of think that foreign non-resident buyers probably haven't had a big role to play in the recent run-up. I mean, in terms of the stress test,

the bump up in the qualification rate is a lot less than when the government first implemented the stress test in 2018. Going from no stress test to stress test was a bigger jump than going from stress test to a little was a bigger jump than going from stress test to a little more stress test, which is basically what we're doing now. Yeah. And what if they made that jump even more, like an even more stringent stress test? Could that move the needle?

Or what are the pros and cons of doing that? Well, I mean, potentially it could. It would make it harder for more people to get a mortgage. Potentially, it could. It would make it harder for more people to get a mortgage. I guess the downside of that is the people that are most affected by that is first-time homebuyers, the ones we want to make sure we're helping are first-time homebuyers, then that doesn't help. Right. You don't want to say, okay, well, let's make it even harder for you to buy a house than it already is, I suppose, is the argument there. What about some other things that you hear a lot about? What about some other things that you hear a lot about?

Here's one that I don't even understand how this exists, blind bidding. So, you know, you hear these horror stories of people finding out they have bid like way over asking that they were like $100,000 above what the second person had bid. And, you know, I don't know, if I was a billionaire buying a painting in an auction, I would know what the other guy was bidding. And then on top of that, there's now these things called escalation clauses that people are putting into their offer. So basically a declaration that they'll bid 5000 bucks more than the highest bidder at the end of the night. So like, why is this still happening? And if this was done away with, would that make a difference? Why is this still happening? And if this was done away with, would that make a difference? Well, this, I mean, really the blind bidding, limiting blind bidding is one that there's been a lot of talk about recently. And actually, Quebec seems to be making some moves to at least look at reforming this practice.

And we'll see what comes out of that. The thing is, all of the regulation of these kind of, you know, real estate sales practices happen at the provincial level. Okay, so good for us to keep an eye on Quebec. Zooming back out to what could be done nationally. I know we talked last time about how low interest rates are feeding into this frenzy. You know, obviously, it's very cheap to borrow money right now because of the pandemic, and experts say this will be the case for a while. So essentially the Bank of Canada

is not going to put the brakes on this. But how long do you think we can expect interest rates to stay low for? Well, I mean, the expectation right now is for quite a while. The Bank of Canada is signaling that they don't really want to raise rates until the end of next year. And, you know, they have good reasons for that. The economy is in a pretty deep hole right now.

A lot of people are out of work. A lot of people are depending on help from the government. But that being said, I mean, rates are already rising a little bit just because growth has picked up. The Bank of Canada doesn't set all rates across the country. It's also set in the market. There's a lot of other forces at work. But you got to remember that we're starting from like a record low base. So from a longer historical perspective, it's still going to be pretty cheap to borrow for the foreseeable future, even if things do lead to a life-changing connection.

Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people

I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. I want to look back to something that we were talking about earlier, which is that homeowners are such a huge voting bloc. And I know this is something that we talked about last time as well, but the issue of adding a capital gains tax to primary residences and how that's such a hot potato issue because people obviously don't want to all of a sudden have to pay a new tax on their home when they sell it. But I wonder, do you think there's enough concern about what's happening right now that something like this could

could conceivably be put in place, that there is a political window to do it it is something people have been talking about more you know bank economists have been raising this as a as a possibility um so from that point of view it's in the conversation at. I don't think we've heard any politicians actually talking about it. So maybe it hasn't made that jump yet. Interestingly, when the bank economists and others, you know, sort of evaluate implementing a capital gains tax on primary residences, the verdict on whether or not it would help us out of our current situation is kind of mixed. And in fact, some people are kind of thinking that maybe it would be counterproductive because it would make people less likely to sell their homes because suddenly,

you know, oh, they're facing a big tax bill, maybe they'll wait, which, you know, that decreases supply in an already pretty supply constrained market, which may cause the prices of what's on the market to go up even higher. That's sort of where the debate is. But I mean, you got to remember, the debate hasn't really made it to the political arena. It's mainly economists talking about this. Yeah. What about like, going halfway here, like some sort of capital gains tax on homes that get sold real quick right like house flipping i know last time we talked about this guy who bought a house in brampton and sold it for almost 30 percent more three months later and i know this is something they're doing in new zealand right a speculator tax is another thing that has been thrown about as the people who discuss such things have been trying to brainstorm ideas of what we could do.

But at least the data we have so far, and admittedly, it's pretty incomplete, suggests that speculation has not been a big part of the market over the past year. And so cracking down on whether or not that'll help is sort of a big question. Fundamentally, what seems to be driving this market is people want to live in these homes. People feel cramped in their city apartment or condo or townhouse and are looking for bigger space. Well, I guess that then brings us to what I know a lot of people point to the real solution here, which is the housing stock. We talked about this last time as well. And I feel like I was a bit dismissive at the time thinking, and I think I said this to

you, like, why can't we just move to make more homes? This is such a big country. But I know you just wrote about how we're the second largest country in the world, but somehow we're running out of land. And so can you walk me through that? Yeah, sort of the first step to why, you know, Canada seems to be running out of land is that so much of the population, so much of the economy are kind of packed into these three major metropolises, you know, Toronto, Montreal, and Vancouver. So that right away kind of limits the area where we can, you know, find a place to live because we have to be within commuting distance, however you define that, of these places where, you know, most people are best able to find a job and support themselves.

And then it's things have gotten sort of constrained further. One, because I mean, there's some geographical constraints. You can point to Vancouver, where on one regulatory constraints that have limited what kind of housing we can build. So, for instance, in Ontario, like around Toronto, around Ottawa, there are green belts. And, you know, those were put there to prevent urban sprawl, because we decided that urban sprawl wasn't the thing we wanted for our cities. But that takes a lot of land off the table to build the kind of single family detached houses that have really driven the housing boom over the last year. So people who want to live in those kind of homes are rightfully perceiving that they're bidding on a scarce resource. And so they're bidding it higher. I mean, there are similar zoning restrictions that I've heard about in Vancouver, too. But beyond that, we also have a housing shortage in general. The Bank of Nova Scotia did a study

that showed Canada had the lowest number of housing units per capita of any G7 country. the lowest number of housing units per capita of any G7 country. And that includes, you know, condos and apartment buildings. So we also don't have enough of those. And for that, it's not so much land per se, you don't need a whole green belt to throw up a condo building. It's that the places that we do want to build these in our cities in Toronto and Vancouver and Montreal, there's often zoning regulations and various rules around development that make it harder, that can slow it down a lot and make it more expensive, frankly. And so I know that anyone who's living in those three cities has been saying, man, I've seen nothing but condo towers being thrown up the last 10 years. What do you mean they're not building condos?

I mean, they have been, but not enough. The supply that's been coming has not been enough to keep up with the demand, which has been driven by immigration and our immigration-driven population growth, which is, again, the fastest in the G7. We're a really fast-growing country. When it comes to apartments, when it comes to condos, that's really because it's a slow and fairly uncertain process to get zoning. People who live in detached ground-level houses in these cities are kind of resistant to having a condo building, an apartment thrown up right next to their house, putting shade on their front yard and backyards.

There's often a lot of resistance. Ari, I hear a lot of people say that they think it's just too late, that there's been years and years of inaction, and that this dream of homeownership is over. Yeah. I mean, in terms of what to say to them, I'm not sure I know what to say. I'm not sure I know what to say. The main thing that almost everyone who is looking at this closely seems to say, whether they are housing activists who are part of this YIMBY movement that's coming up in North America, or academics, or even bank economists, people in the development industry itself, or even the bank economists, people in the development industry itself. The one thing they all say is that we need to find a way to build more multifamily housing,

whether that's condos or apartments in our big cities. And to do that, we need to work on these zoning restrictions. We need to try to smooth out the process of development so that we can build more of these things and faster. The truth is, at least in my reporting, I haven't heard a lot of politicians, almost at any level of government, talking about ways to do that. I mean, maybe the fact that the political parties here, the federal political parties are starting to talk about housing and housing access and affordability more could be an opening for that. But that kind of big change, it doesn't seem to be taking center stage yet in Canada. Okay. Well, Ari, thank you so much for this.

This is super interesting, as usual. And I hope you'll come back soon to talk about this again. Thanks, Jamie. It was a pleasure. All right, that is all for this week. Friend Burner is brought to you by CBC News and CBC Podcast. The show was produced this week by Elaine Chao, Imogen Burchard, Shannon Higgins, Allie Janes, Ashley Fraser, and Mariam Kacha. Special thanks to Bryce Hoy in Winnipeg for also helping us with our episode

about COVID denialism and anti-vax sentiments in Manitoba. Our sound design was by Derek Vanderwyk, Devin Nguyen, and Mackenzie Cameron. Our music is by Joseph Chabison of Boombox Sound. The executive producer of Front Burner is Nick McKay-Blocos. I'm Jamie Poisson. Thanks so much for listening to Front Burner. We'll talk to cbc.ca slash podcasts.