Front Burner - Winners and losers in Canada’s wild housing market

Episode Date: April 2, 2021

A closer look at the flaming hot Canadian real estate market that has defied expectations, through the eyes of one woman struggling to buy her first home far out from the big city, and 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. Think back 11, 12 months ago. It was the early days of the pandemic. The economy was at a standstill, unemployment was spiking, and a giant recession was looming. And at the time, some experts predicted this could cause a serious

slump in Canadian real estate. And if that happened, well, the entire Canadian economy would be on the ropes because, and this still sounds surprising every time I say it, real estate makes up a huge chunk of this country's economy. At the time, we asked on the show, economy. At the time, we asked on the show, is Canadian real estate too big to fail? Well, those were the anxious predictions then. And this, this is now. Cheap money and the work from home trend are fueling sales activity in the country's hottest housing market. New numbers from the Greater Vancouver Real Estate Board. In Montreal, housing prices are on. Nova Scotia's red hot real estate. Calgary's housing real estate board. In Montreal, housing prices are on. Nova Scotia's red hot real estate. Calgary's housing real estate market appears to be heating up. We've never seen such a market.

Prices are up between 30 and 40 percent. I'm Jamie Poisson and today we're going to be talking about how the Canadian real estate market defied expectations to become hotter than ever, and what the consequences might be. But first, I want to bring you the perspective of a young woman struggling to buy her first home. Not in the predictably expensive Toronto or Vancouver, or even the city's suburbs, but where she's from in rural Ontario, more than an hour drive from the big city. My name's Rebecca. I am currently living in Tottenham, Ontario, and I am 25 years old. Rebecca and her partner Adam have been looking for a house for the last four or five months. She's a caseworker at a youth homeless shelter, and Adam's a carpenter. They've saved up for a down payment, and they're hoping to find a place for less than $450,000. We would love to live in Simcoe County, but that is a little outside of our price range.

So we've started looking in Dufferin County and Gray Bruce as well. And what do you like about those locations? We both have grown up in a small town and enjoy the country feel of it. So we want to try and find that for ourselves as well, where we have a little bit of land and a nice house and just space to be ourselves. She says that while it's been exciting to look for a house together, there have been a lot of letdowns and that the market feels totally crazy. Like one house she looked at in Hopeville, Ontario was listed for $399,000, a three bedroom, two bathroom bungalow. She was the first offer in

at $410,000. Nowadays, because of this market, they turn it into a bidding war. So we were the first in and next thing you know, I think there was four other offers in and I was five. And obviously right away we got outbidded because people have money, right? They want something, they have the funds to do it. And so it was listed at $399 and it sold for $525. Wow. Okay. Yeah, it was absolutely insane. Rebecca also looked at a place in the township of Melanchthon, Ontario, about an hour and a half's drive from Toronto. It really was our dream house. It was on a beautiful piece of property. Three bedroom, one bath.

It was a power of attorney, so they were just trying to sell it and get it over with as soon as possible. The house did need some work, but with my partner being being a contractor he knows how to do all of that right very heavy yeah yeah it's it's awesome so the house was listed at $299 and once again we were one of the very first people to see this house after it was listed um we put an offer in right away and we were offering one for for a little while. And next thing you know, there was two offers, then three, then five, then eight, then 12. And I think if I'm correct, the grand total was over 20 offers in this property. Wow, wow, wow. And the absolutely mind blowing thing is, is it was listed for $299 and sold for $526.

Yeah, it's crazy. I don't understand how first-time homebuyers are supposed to have the funds to purchase something that's that high. Do you have a sense of who you were up against here in these cases? Who was bidding against you? Unfortunately, no. The real estate agent's legally not allowed to talk about other offers that come in or the people that are buying them. But I can only assume that they're people that are coming from the city because there's no market down there right now trying to come up and live in the country for cheaper. And they have the funds to put down more money than someone like us. How does that make you feel? You know, you grew up around here. Oh, it's frustrating. Like you, like we grew up around here and we want to stay in the area. We don't want to have to move away.

So seeing something like that, our dream property right there, go for so much more, it was a little bit heartbreaking, right? Like we had planned everything out in the house and then next thing you know, like, oh, sorry, they didn't go with your offer. Trebekka, it's been really surprising to see these kinds of prices so far out of the city. Our VLC agent, she will send us comparables for the area. So houses that are on the same street or within close proximity to see what they had sold for. And a lot of the places that we were looking at, they sold for under asking for $280, $300. They sold for $280, $389. They sold for $384.

And it's just crazy to see the turnaround now that just the prices have skyrocketed. So how did it happen that someone like Rebecca is finding herself in this position? Less than a year after even the Canadian Mortgage and Housing Corporation, basically the government's national housing agency, was predicting housing prices were going to tumble as much as 18 percent? I've got Bloomberg Canada's real estate reporter Ari Altstetter with me to explain. Hi Ari, thanks so much for joining me. Thanks for having me. Okay, so we've alluded to the fact that Canadian housing prices have been going crazy and not just in the big cities and I was wondering if you can give me a few more details on that. What's it like out there right

now? Well, I mean the mantra that I've heard from real estate agents and people in the business is that basically it's drive until you qualify, which is to say, you know, if you're in Toronto or Metro Vancouver or from these cities until you find a place that you can afford. And it's causing the affordability issues and the intense competition for houses that we've had for years, frankly, and I mean, particularly Toronto and Vancouver, they're sort of being exported out further and further away into the suburbs and then the small cities and then the small towns further and further around these major cities. Right, right. I know you recently spoke to a guy who flips houses and he bought a house in the Toronto suburb of Brampton to flip and tell me what happened. Right. Well, I mean, he closed on that house in what was in December. And this was not a remarkable house. And only three months later, he sold it for almost 30% more. That's not just, you know, year over year price appreciation.

That's three month price appreciation, which really shows just how fast the market is going right now. And, you know, we're talking about the suburbs outside the city, but things have been also pretty insane in Toronto and Vancouver too, right? Oh, yeah. I mean, what people want, sort of spurring all this, is that people want ground-level homes. They want a backyard. They want space, you know, for a home office or maybe for two partners to each have their own home office. And so, I mean, if you can find that, if you can afford that in Toronto or Montreal or Vancouver, then people are. And there have been huge bidding wars and huge price increases there too. But when people can't, or they're just priced out, then they go further out. And because, you know, those communities further out, they started at a lower base than the houses in Toronto, Montreal, Vancouver, they just had much further to rise, particularly when it's the people who were in Toronto, Montreal, Vancouver, earning Toronto,

Montreal, Vancouver salaries, who are now bidding for those properties further out. You're kind of alluding to this now, but less than a year ago, we literally did an episode about this, and there were lots of smart people predicting doom and gloom here for the Canadian housing market. So tell me a little bit more about what happened. Why did things shake out so differently? Right. Well, I mean, you know, people were expecting that the economy is going to tank. And when the economy tanks, the housing market will tank, which made a lot of sense. But what people didn't anticipate

is the particular way the economy would tank, that the pain was very severe, but also very concentrated in one part of the economy, one group of people. And these are really, you know, the industries that are face-to-face industries. You know, if you work as a server in a restaurant, you work as a bartender in a bar, you work as an assistant in a retailer. These are the people that have been put out of work. The thing about these people is they generally are lower earners, which makes them generally more likely to rent than buy. earners, which makes them generally more likely to rent than buy. The people who haven't been really hurt by the lockdowns and the resulting economic damage have been professional workers. These are people who are able to work from home. And so they've kept their jobs and kept their earning power just fine. And that put them in a position to take advantage of the very low

interest rates that the government deployed to try to help the rest of the economy. Right. And of course, like you said, these are the people who now want a backyard, who want an office, who realize if they're going to work from home, they could maybe move a little bit further away from the city. And on that note about low interest rates, can you just expand for me a little bit more on why the interest rates are so low? Right. Well, I mean, basically, interest rates are in large part set by a country's central bank. In our case, it's called the Bank of Canada, which is a branch of the government that's sort of, you know,

it's semi-independent. It works at arm's length or independently from the federal government. And when you're in a tough economic situation like we are in now, the thing to do is to lower interest rates, because that stimulates the economy broadly. It allows people to borrow at a cheaper interest rate, to fund their business, to start a new business, to pay their employees, to buy raw materials so they can make new things, all that kind of good stuff. And so it's sort of, in a lot of ways, the country's first line of defense for stimulating economic growth when it looks like we're not going to have much economic growth. But of course, another thing people borrow money to do is to buy a house in the form of mortgages. So even though you're making it cheaper for,

you know, businesses to borrow to try to stay in business or for people to start new businesses, sort of knock on effect of that is you're also going to make it cheaper to get a mortgage and buy a house. And that's people who have really been taking advantage of that. Nova Scotia's red hot real estate market is showing no signs of cooling down. Home sales in the province last month are up nearly 32 percent compared to February 2020. Sales are also particularly strong for the more expensive homes in Toronto, Ottawa and Montreal. Strong for the more expensive homes in Toronto, Ottawa and Montreal. There's some points in last year when you could get a mortgage for less than 1% interest.

Yeah, it's wild. And so, of course, if you can get an interest rate for that low, you can afford to buy a house for more money because your monthly payments go way down. I reckon the kinds of people who can think about buying right now, it might not just be for, you know, a cozy, bigger house to live in, right? Like, I imagine that it's also things like investment properties, right? If you're making good money, and the interest rates are so low, people might think real estate is a good place to put their money and and watch it grow. I mean, I guess the guy in Brampton who made 30% in three months is a pretty good example, right? Yeah, absolutely. I mean, and that's actually, you know, the government's both the Bank of Canada and Minister Justin Trudeau, that's one of their biggest worries, one of the things they're watching most closely to see if speculation,, want a vacation property to visit in the summer, who are buying, but rather that it's people who are doing this solely as a financial, you know,

investment, who are driving the market. I mean, so far, it doesn't look like that's the main thing. And this is what, you know, the leaders of the Bank of Canada have been saying that, And this is what, you know, the leaders of the Bank of Canada have been saying that for the most part, it's end users who are buying these properties. And speculative activity doesn't seem to be driving the market, but it is becoming a bigger part. Because, you know, who can say no if you have the opportunity to get a 30% gain in three months? You know, it gets pretty irresistible. Oh, my God, it's unreal. three months, you know, it gets pretty irresistible. Oh, my God, it's unreal. I mean, the only other thing in recent memory that could make you that kind of money that quickly was if you if you, I don't know, gotten in on the GameStop stock. Yeah, exactly. That's that's and you know,

that's a good comparison. I mean, that's the kind of frenzy, the GameStop frenzy is kind of thing people are worried about happening here with real estate. Hi, it's Ramit Sethi here. 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 also want to talk about the psychology around this. I find the psychology around Canadian housing really fascinating. But, you know, you hear a lot of people talk about FOMO going on here, essentially, fear of missing out. And tell me a little bit about how that factors into what we're seeing as well. Yeah, well, that's another sort of aspect of the market psychology as well with pure speculation.

That's another thing that policymakers are watching really closely and are kind of concerned about. And, I mean, basically it's a question is, are people buying houses now because they need a bigger house right now and they have the financial wherewithal to do it? Or are they doing it because they think if I don't do it now, it's only going to get more expensive later. And so I am going to stretch myself financially as far as I can go to take advantage now, even if I don't really need it now, because this is an opportunity that's closing because things are going to only keep on getting more expensive. Yeah, we're starting to see that. You know, the other thing about Canadian housing,

which I find really interesting, I think that this absolutely precedes the pandemic, is the Canadians love houses, right? Like, I'm not sure we see this in other places in the world. Canadians love their backyards and their garage and their houses and maybe because it's cold here so many months a year, but I feel like that's also got to have something to do with it. Yeah, no, you're absolutely right. It's something that is in some ways unique to Canadian, maybe Canadian and American, you know, culture. Us

North Americans, at least, you don't see in other parts of the world. And, you know, I mean, in a lot of places in Europe and in Japan, people spend their whole times living in apartments their whole lives. Often they don't even own those apartments their whole lives. They're quite comfortable renting. maybe even more so in the United States in some ways, you know, buying real estate is the time-honored way to get financial security, to get your way into the middle class. And one of the big concerns is that as prices balloon higher and higher is that that's getting closed off to people who don't already have a house. I want to come back to that in a minute, because I think it's really important what you just said. But first, for the people who are buying houses right now, you know, I get that interest rates

are very low. And people feel like they can buy a million dollar house and they'll be okay with that expense. Frankly, I mean, in a lot of places, it's well over a million now. But what if interest rates do go up? Is that a concern here? I mean, that is the most sensible concern to have. What happens when interest rates go up? Because I mean, in a lot of ways, it's low interest rates that are driving the market we're seeing right now. And so it would be higher interest rates that could upset it. I think the reason you're not hearing a lot of concern about that so far, and I haven't in a lot of the people I've talked to, is that the Bank of Canada, which is, remember, the main institution that sets interest rates, is saying that we're not going to raise interest rates until like 2023.

And so that's a pretty long runway. And even then, if you only start at that point, they're at really low rates now. If they only raise a little bit more from that, they're still going to be like historically low compared to where they've been for most of Canadian history. So it is just not something that people see as being a very imminent concern. So our producer Imogen spoke to this insolvency trustee in Toronto about this, Scott Theriault. And I just want to play for you what he had to say about this and then get your reaction. My concern is the dichotomy between approvals and affordability. Just because you get approved for a mega mortgage, I'm not buying that people who aren't getting serious financial help from family are going to be in a position over the long haul to really be able to A, afford their mortgage every month, and B, to have any money left over to spend in the economy. And I understand that a number of

mortgages, people are okay in terms of the stress testing. But I meet with people every day who stress testing. But I meet with people every day who are paying 50, 60% of their monthly income to their mortgage. That's danger area in my mind. And if no event happens, great. But I meet people every day who had an event happen, divorce, job loss, even just hours reduced. You have a kid and now a couple of years later, you're into daycare. Daycare is a massive expense. Did anybody plan that in? So have you heard concerns about this idea that just because a mortgage has been stress tested might not mean that it's particularly affordable? Right. I mean, that is definitely something to be worried about in terms of how much a person's monthly income is going to their mortgage

payments. The truth is, in my reporting so far, I haven't heard a lot of people worried about that because I do think the stress testing takes that into account. But I mean, the general sort of theme that Canadians are stretching further and further and taking on more and more debt, you know, is definitely something that's being echoed from, you know, leading economists to policymakers to the Bank of Canada governor himself. So the general worry that the mortgages are getting too big,

you know, is definitely sort of a leading concern. One thing that really surprised me when we were talking about this issue last year was just what a significant chunk of the Canadian economy is wrapped up in real estate. There's this huge ecosystem around it. Agents, lawyers, mortgage brokers, construction, like real estate is a bigger sector than oil and gas, for example. And so if so much of our economy is wrapped up in real estate, and real estate is booming in such a crazy way that, you know, houses in Brampton are selling for 30% more in a few months, and Rebecca's dream home in Melanchthon is getting more than 20 bidders and it's going over 500K. Like, is this healthy for the economy?

Why would people be worried about the market being so hot? For example, I saw BMO, a major bank and mortgage lender, put out a report this week saying that this is a fire that needs to be doused. Well, I think the main worry that they have and sort of the most urgent worry is that this rapid run up in prices is setting us up for an equally rapid decline, which could be really destabilizing to the broader economy. I mean, if prices sort of slowly level off, I guess it's not so bad. But if prices go down as fast as they've been going up, or potentially even faster, it can kind of spill over and cause a lot of problems to the rest of the economy and put a lot of people who maybe could have borne out a slower decline in much more acute financial distress. And the reason that's a big worry is because, you know, so much of the Canadian economy is still tied up in consumer

spending. And if so many Canadians who own homes, whose wealth is tied up in their homes, suddenly find that they're a lot poorer, or they're feeling a lot poorer, they're going to stop spending on other things. And that could really hamstring the broader economy. Right. I mean, we've talked about this on the show before. So you know, if you bought your house for 500,000, and all of a sudden, it's worth 2 million, you feel richer. Maybe you take out another mortgage. You spend that money on an addition. But of course, if prices, as you just said, rapidly decline, that goes away. Is that what we're talking about here? Exactly. This BMO report called on policymakers to do something here.

And what kinds of things could policymakers actually do? Well, yeah, that's sort of the tricky thing at this point is we don't know. There's every option. It doesn't seem like there's like one silver bullet that could just solve the problem. And I read that BMO report, too. And it's sort of interesting because it went through a number of options and sort of rated them by, you know, how effective they would be, how complicated they would be, how much spillover and other parts of the economy they would cause. And there's no like perfect answer is sort of the issue. So I mean, one idea that's been thrown around is a sort of, you know, tax in some way tailored to damp speculative activity. So that's one option. But you know, as we were saying before, even policymakers don't think

speculation is driving the market at this point yet. So does it entirely solve the problem that we're having right now? Well, maybe not. I mean, another thing that's been talked about a lot is there's been a very long standing and very popular tax exemption for the capital gains a person sees on a person on their primary residence. So, you know, you were talking about for obvious reasons that, yeah, if you bought your house for 500,000 and then by the time you go to sell it, it's 2 million, you don't pay tax on those gains.

And there's been talk about, well, maybe we should tax those gains or tax those gains maybe above a certain threshold or something that might be a very hard political pill for the government to swallow. I get why that would be such a hard political pill. What would that achieve, though? Well, that's the other thing. And I think, I mean, in broader terms, it makes it a little bit less worthwhile just to buy a house. But I mean, that's another thing that the BMO report highlighted, is that it may not be an immediate solution to the kind of, you know, market frenzy we've seen.

So like I say, it just I mean, it there's no real magic bullet. There's a whole there's a whole number of options. And it may take a few of these options together to do it or not do it. I mean, in a lot of ways, it may just come down to there's not enough supply. And this is something almost everyone is saying. This is what I was going to ask you next. Why don't they just build more houses? Most economists and the federal government sort of say that is a big part of the solution. The thing is that building more houses has been a slow process, particularly in Canada's major cities where there's the most demand, like Toronto, Vancouver, Montreal. Just because the rezoning process, the development process is a really slow process where, you know, all the stakeholders, the local community, the neighbors, they all have to have their say. local community, the neighbors, they all have to have their say. And that's really slowed things down and meant that really for a long time now, there hasn't been enough housing supply to fill

out the demand of our rapidly expanding population. And how you fix that, I mean, it's complicated because it really takes changes at every municipality and every province. Yeah, yes, it is complicated, although it does seem very simple. We're a very big country, you have a lot of land, but I take your point. Ari, before we go today, I want to come back to this issue of inequality. And, you know, this strikes me as yet another example of how the pandemic has shone a spotlight on these issues in our society and exacerbated these issues in our society. become the society of people who own homes or even whose parents own homes and people who don't and can't own homes. And can you talk to me a little bit more about that? Yeah. Well, I mean, basically for a long time in Canada and for the United States too,

as we were saying before, the way to become part of the middle class and have financial stability and build wealth was to buy a home. And the problem with the really, really rapid appreciation that we're seeing in real estate values and residential real estate values is that they're getting out of reach for people who don't have a substantial source of wealth already, people who just are earning a regular income. The affordability of real estate in Canada has seen some of the worst deterioration in the world. There's a sort of think tank that looks at this called Demographia. And they've noted that in Toronto and Vancouver of the past 15 years, affordability has deteriorated worse than anywhere else. And that means that, you know, on a normal income, how likely are you

to be able to buy a piece of property? And if people can't do that, if the only way they can do it is with a gift from their parents or, I don't know, winning the lottery, then it means that wealth inequality becomes really, really entrenched and much more entrenched from generation to generation. It gets much harder for someone who isn't already starting, to generation. It gets much harder for someone who isn't already starting, born to some sort of wealth, to build it. Ari, thank you so much for this conversation. Thanks for having me. To play us out on this Friday, a very topical song that our executive producer, Nick, really wanted us to play by Tim Heidecker. Are there going to be cemeteries a hundred years from now? Can someone tell me how we won't resist the urge to turn it into property.

Property, money making property. Oh, property is all they'll see in those fields of green. Is all they'll see in those fields of green Oh, the dead won't care They'll just be lying there Hanging out Just growing hair They gotta know we're running out of space to live up here Put a high rise up and they would be a fool

If they didn't see it with a swimming pool Seven stories and seven below For a parking lot They could put a coffee shop On their first floor. Front Burner is brought to you by CBC News and CBC Podcasts. The show is produced this week by Derek Vanderwyk, Elaine Chow, Ebion Abdegir, Imogen Burchard, and Simi Bassi.

Our sound design was by Austin Pomeroy, Mackenzie Cameron, and Derek Vanderwyk. Our music is by Joseph Chabison of Boombox Sound. The executive producer of Front Burner is, of course, as I just mentioned, Nick McCabe-Locos. And I'm Jamie Poisson. Thank you so much for listening, and we'll see you next week. Old property is all they'll see in those fields of green. See you next time. Don't blame them, everything changes. We did it to the Native Americans. Don't blame them, everything changes. All you can do is keep on living.

Keep on living. Keep on living. In property. Property. Keep on living in property Property That property Oh, property It's all you see in those fields of green Oh, in those fields of green Oh, yeah, the fields of green

Oh, yeah, yeah Oh, yeah Oh, yeah For more CBC Podcasts, go to cbc.ca slash podcasts.