Front Burner - Is a housing crash an affordability fix?

Episode Date: May 25, 2023

As some prospective home buyers watched prices climb to dozens of times their income during the pandemic, they pinned their hopes of ownership on a market crash. And for nearly a year starting last April, prices did fall – in Toronto, the average price of a home dropped about 18%. But now, for the last two months, prices have been on the rise again. So with houses still historically unaffordable, what would it take for Canada’s home prices to drop or crash toward affordability, and would the economic damage do more harm than low prices can help? Today, Canadian Center for Policy Alternatives senior economist Marc Lee explains the paths that remain to ownership for the low and middle class. For transcripts of this series, please visit: https://www.cbc.ca/radio/frontburner/transcripts

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 Alex Bonetta. Traditionally, red-hot markets like Toronto and Vancouver are seeing fewer bidding wars. Meanwhile, sellers are getting a reality check. The national average price down nearly 12% from the same time the year before.

Last spring, something unusual started happening in Canada's housing market. The price of a home was falling. In previous decades, average prices had sailed high above Canadians' incomes. And then, during the pandemic, somehow, prices rose even faster, thanks to low interest rates. But then, starting last April, something snapped. Toronto saw the average price of a home fall about 18%. It gave some Canadians hope that they could finally realize their dream of home ownership. And something unheard of in recent years is happening more frequently. We were able to purchase it under the asking price. Well, this year has brought us back to reality.

An expensive reality. Prices have once again risen for the last two consecutive months. And last week, a report from RBC forecast that this quote-unquote correction is over. Saying sellers are back in the driver's seat. For young housing hopefuls relying on a larger dip or even a crash, this reversal raises some tough questions. Is a real crash even possible? Would it do more harm than good? And can any amount of tweaking get us back to

affordability in this market? To get some answers, I'm joined today by Mark Lee. He's a senior economist for the Canadian Centre for Policy Alternatives, based in BC. Hi, Mark. Hey, how's it going? Well, thank you. Thanks for being here. So we've talked a lot on this show about how and why Canada's soaring housing prices started climbing even faster during the pandemic. But in April of last year, that trend reversed. And so what was it? Why for about a year did we actually see housing prices drop?

Well, I think a lot of the story is around interest rates. If we actually roll back the clock a little bit further to the 2008 to 2010 financial crisis, the Great Recession, as it was called, in the aftermath of that, we've had a period of very low interest rates historically. And low interest rates mean you can borrow more money in order to take on a mortgage, and that pushes prices up higher. Then during COVID, as part of the emergency response for that, we lowered rates even further, essentially to the rock bottom in order to provide liquidity to the economy. And indeed, people took advantage of those really low interest rates, and that pushed prices up even more. As inflation has started to rear its head,

inflation has become a top priority for the Bank of Canada. And essentially during 2022, we saw a record number of interest rate hikes try to stem that inflation. So instead of buyers having FOMO going into the market, people are now much more reticent. A lot of the more frothy investor behavior pouring into housing looking for quick returns has pulled out of the market. And we're also, I think, at a point where people have maxed out their debt levels. So all of those have pulled the market back down. And now it's a question mark about where we're going right now. We seem to be seeing some new signs of upward movement in the market. Really looking forward, it's hard to say where it's all going to go.

Yeah. So like you've got the amount of homes being sold plummeting, but it's despite this parent correction in the housing market, still getting more expensive to buy a home, right? So like the average person didn't really benefit much, right? Yeah. I mean, there's been a bit of a drop there. We're still at levels that are extremely high by any historical standard. And so rather than just looking at the price of a home, if you

look at it relative to the incomes that households have, like a typical home would have cost seven or eight times someone's income back in the 1990s, and now it's more than 20 times. So it's a lot more of your income, of your life savings for a down payment, of ongoing costs over your working life to cover that cost of housing. It's just become so much. So I want to spend today talking to you about the ways, in theory, prices could come down. Let's start with what many young buyers have been pining for, a crash or a correction that would make prices affordable again. So if policymakers let unaffordability go unchecked, what would it take for the housing market to suddenly crash? Well, I mean, first of all, a lot of the reason real estate markets go up and down depends on the confidence that people have. When things are in a down cycle, as they have been for now, the concern is that if the overall economy weakens substantially,

then you could have a number of distressed sellers, so people who need to sell because of a death in the family or because of a divorce. And they can hold out for a little while, but at some point they actually need to sell and they would have to sell at a loss. And then that sort of triggers where the market resets. So what would it take? Would it take a massive recession? What would be required for that correction to happen in a substantive way? Well, a massive recession would indeed bring house prices way down, but it's potentially one of those Pyrrhic victories. If you keep your job and are doing well, then you're able to buy in at those lower prices. But the overall impact of those prices falling itself has an economic impact. So if you imagine that prices fell by half, then there's a lot of people whose nest eggs, you know, most people's wealth, to the extent they have wealth at all in Canada, is tied up in their housing. So all of a sudden, if the value of your house has dropped in half, then you're a lot more concerned and you're going to be spending less money in the overall economy elsewhere. So these are real economic impacts that would sort of

compound. Now, does that mean prices would crash? It's hard to say that they would in the sense that there's so much demand that gets underpinned in Canada by high levels of immigration. So there's always people moving into the country. Not all of them are super wealthy, but enough of them are that they can keep a floor under overall prices. But yeah, I mean, that's the danger is like you could see a situation where prices do actually fall and appear more affordable, but you know, interest rates are higher and the amount of income that people have in the aggregate anyways is a lot less. Yeah. Okay. So what about debt? I mean, how does the huge amount of debt Canadians are carrying factor in? I mean, yesterday, the Canada Mortgage and Housing Corporation said we have the highest household debt levels in the G7. Yeah, I did some number crunching on this back in December. You have a whole sort of cascade of mortgages that are renewing and costing the homeowners

a lot more money to service them. So when you look at that and you look at personal loans on top of that and other home equity lines of credit and those sort of things, the total increase in debt that needs to be repaid in 2023 compared to 2022, it's equivalent to 2% of GDP, which kind of sounds like a small number, but that's enough to turn a robust economy into a slowdown, if not outright recession. So we've talked about the potential shock treatment of a recession. Well, let's talk about a more nuanced policymaking approach. Over the last couple of years, we've seen a whole bunch of policies from different levels of government, approach. Over the last couple of years, we've seen a whole bunch of policies from different levels of government, ranging from incentives for new buyers to cutting red tape for development

to a foreign buyers tax. Taken together, what effect, if any, do you think all of this stuff has in terms of bringing prices down? Will it do anything? Some of these measures can have an impact. If we roll back the clock to 2016, 2017, there was a big surge of foreign buyers in Canadian real estate, particularly in Vancouver and Toronto. The British Columbia government brought in a foreign buyers tax. Metro Vancouver's housing market has just been turned into a massive experiment. As of this week, foreign homebuyers have to start paying a new tax. 15% tacked on to the purchase price of a home. And then that was later increased. The Ontario government brought in a foreign buyers tax. With this tax, we're targeting people who aren't looking for a place

to raise a family. They're looking only for a quick profit or a safe place to park their money. They're looking only for a quick profit or a safe place to park their money. This 15% speculation tax will apply to people who are not a citizen. In BC, at least where I live, the amount of foreign capital flowing in has really, it's not gone away, but it's gone way, way down. So those type of measures to put speed bumps, particularly on demand for housing that's not necessarily what you want, like people who are investors flowing into the market, they can actually work. I think too much of the emphasis has been put on

foreign investors as opposed to domestic investors. We're just as good at speculating domestically as foreigners are. And certainly what we saw in 2022 was a lot of investors buying up rental apartment buildings with the intention of jacking up rents to make additional profits. So I think that's a big challenge. But if we're looking at that affordability over the long run, I think there's a few big structural things that we should be thinking about. One is zoning, which is the density, the amount of housing you're allowed to build on any particular parcel of land. I think there's changes in the tax system because thes and 80s, Canada invested a lot in non-market housing, meaning it's housing that's not for profit. You have a cost of building it, but you really just need to set rates at a break-even level, as opposed to a private market rental system where landlords have an

incentive to jack up rents every time a tenant moves. So I think a really big build out of non-market housing, it's something that the federal government has talked about but hasn't really delivered on. It's something that provincial governments talk about but haven't really delivered on. But that, I think, is really what's needed right now. 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 Couops. So I want to talk about the politics and why some of these solutions aren't happening. I mean, it's worth raising the truism that governments answer to their constituents and hardline measures to stop rising prices aren't universally popular in Canada. It might sound obvious, but who in this country has an interest in keeping housing prices high?

Well, the people who are homeowners and landowners have an interest in keeping prices high. Now, it depends on when you bought. If you bought a place 20 years ago and you've seen it increase in value fivefold, you may not feel too bad about prices dropping a little bit if it means that your kids are better able to afford housing. But if you bought more recently at the top of the market, you don't want to see house prices drop 30 or 40% because you might be underwater. The value of the debt that you pay may be greater than the value of the house that you're living in, and that would be a difficult situation. There's a lot of investors who bought in who are actually now

facing cashflow problems because their interest payments have gone up so much, but they're not able to jack up rents because of rent controls. So they have an interest in trying to keep all of those prices high. So it's about two thirds of households in Canada are homeowners with or without a mortgage and only about one third are renters. And I think that the nature of policy that gets passed in Canada federally and provincially tends to be much more by people who are homeowners than people who are renters, and reflects those interests. The political math there sounds kind of brutal, right? You're asking a government to risk antagonizing two-thirds of potential voters and maybe more if homeowners vote at a higher rate in the interest of solving a crisis for the other third of the population. I mean,

I'm just wondering whether you see any governments taking actions or the actions that you think are required. Well, I feel like the push on non-market housing is totally doable. It wouldn't really challenge anyone too dramatically to scale that up. And really, it's just the upfront cost that the federal or provincial government would contribute to. But the cost of that housing pays for itself over time. Changes in the tax system, I would agree, are much harder politically to enact. Here in British Columbia,

to try to balance that out, the BC government just brought in a new renter's credit, which isn't quite as generous and obviously applies to fewer people and they've made it income tested, but it's a step towards leveling the playing field between owners and renters. So maybe canceling the homeowner grant

was too difficult politically, but bringing in the renter tax credit was not. The final battle I think we're starting to see already, and I talked about earlier, is around zoning. That people who live in nice, low-density, leafy neighborhoods want to keep them that way. They don't want new, higher-density housing in there. We need to break that impasse. And that's a challenge that I think provincial governments are starting to face, changing unilaterally the minimum units and the amount of buildable square footage you can build on a particular lot. But that is a political battle that's going to be fought. And I think things have gotten so bad in Canada that maybe

the public is willing to entertain more radical solutions. You know, we've been talking a lot about intervention in the market or even moves outside the market today. I'm sure there are people who will say, you know, market factors, supply and demand, best left to sort themselves out. But in your opinion, are we at a point where cutting back regulations and leaving the market alone could fix the problem? Oh, absolutely not. I mean, I think it's the market that is driving a lot of these challenges. You know, what developers choose to build on a particular parcel of land, you know, they're capitalists. So they're trying to get as much return as they can on a particular investment. They're going to build condos to the highest end possible. Or if they're building rental, they're building rental that's going to be renting at the higher market rates. They're not just going to build that out of the kindness of their heart. So basically, if we're concerned about housing for low to moderate income households, they're simply not profitable for the development industry

as currently structured. And that's why I think we need to look much more aggressively at non-market housing. In Canada, it's not really part of the conversation because it's only about 4% or 5% of the total housing stock is non-market. But in other countries, it's much higher, anywhere from 10% to 50%. And those countries that have had a much more successful government-led approach to manage and regulate the housing market in the interests of the people, in the interests of the overall economy. Even like Singapore, for example, which is very much a market-oriented capitalist economy, has a housing sector that's dominated by a public housing developer with the intention of providing affordable housing for its citizens. And

there's a lot we could learn for that type of more hands-on approach. So you just mentioned Singapore. I've read about some of the interesting stuff that's been happening over the decades in Vienna, in Austria. I mean, if you could take Canadian policymakers, put them on a plane and send them somewhere in the world to look at a housing development or urban planning, where would you send them? And what would you want them to see? Well, I think Vienna is certainly interesting because a long time ago, they built out a lot of non-market rental housing and it still constitutes something like approaching half of the housing stock in the central city. Singapore is a slightly different model where, I mean, they started out in a housing crisis in the 60s. They were building a lot of rental housing, and they still do. But a lot of

the emphasis is on ownership housing. So it's ownership housing that's on land that's leased for 99 years. So the state ultimately controls the land. But we have a version of that here in Canada. And Singapore is similar legal tradition to Canada because of British colonialism. But the emphasis is on ownership and getting young families into housing. They have policies to try to make sure that people can live close to their elderly parents so they can take care of them. They're building in a way that has housing in close proximity to shops and parks and other services that people need to reduce the overall environmental footprint. So I think there's a lot that Singapore's doing that we could emulate. There's some of the political sides of Singapore, it's a more authoritarian culture, and there are

some of the things we wouldn't necessarily do here. But in terms of how you get housing that's affordable for the vast majority of the people and do it in a big way, Singapore is a great model. Great. Well, thank you for raising some of those examples and for talking to us about the broader challenge and potential solutions. Thanks a lot, Mark. All right. Great to talk to you. Thanks for listening, everyone. That's all for today's FrontBurner. Talk to youbc.ca slash podcasts.