The Bridge with Peter Mansbridge - The House Price Crisis and Why It Affects All of Us

Episode Date: January 25, 2022

For some young Canadians with good jobs and a young family will never be able to buy a home.  How did it ever get to this?  Preet Banerjee joins us and he's got lots to say on this.  Also, EV's reach another milestone in Europe.  It's way more than a fad now.

And hello there, Peter Mansbridge here. You are just moments away from the latest episode of The Bridge, the much-promised talk about housing prices, coming right up. And hello there, welcome to Tuesday. You know, we get a lot of mail here at the bridge about a lot of different subjects. Obviously, for the last couple of years, it's mainly been about COVID, but not exclusively. And one of the big secondary issues has always been housing and housing prices, especially for those people just trying to get into the housing market, the house purchasing market. We had another one of those letters last week. In fact, we had quite a few letters last week,

but the one I read last Thursday from Josh LaMere kind of struck a chord with a lot of people because there were a lot of follow-up letters. And it's this whole issue of, you know, for young people who have jobs and yet are so far out of any reasonable thought of purchasing a house in one of the major cities in the country that it's just out

of reach and they're kind of resigning themselves to the fact that they will never own a house and could I find some way to talk about that so we talked about it a little bit on good talk last Friday with Chantalel and Bruce, but I want to reach out further to talk about it today. And as a result, where did I reach to? I reached to my old friend Preet Banerjee, who we've done a lot of programs

together over the years on television and also here on the bridge. Preet is the host of the podcast Mostly Money. He's a personal financial advisor, consultant, expert. So his whole thing is about trying to help you understand your money, what you can do with your money, what you should do with your money. And he looks at the, you know, housing market. He can't help but look at the housing market. It's staring you right in the face,

no matter who you are and just how prepared you are to enter that market. So I called Preet up the other day and I said, help me on this. And he said, of course, whenever you want. So here's our conversation with Preet Banerjee. So Preet, I'm not even sure where to start on this story, but let's try this. If you're someone in Canada who's living in a relatively major city

and you don't already own a house, what are the odds that you ever will own a house? That's a great question. I think the odds are directly tied to whether or not you have parents who are willing to help you out. And I think this speaks to why this has become a huge crisis. It is creating this generational divide. And it's been growing for a long time, but it's getting bigger and bigger. And to give you an example of why I say it's tied to whether or not your parents are going to help you, whether or not you have a big, what's called BOMAD, the bank of mom and dad.

So there was a report out by, I think it was CIBC, that looked at the average size of a gift for a down payment from parents. And so this is a conditional average. So what that means is it's if you received a gift, the average size of that gift across Canada was $82,000 in order to assist their kids in buying a home. Now, the Toronto average, if you want, because obviously there are certain cities where pricing of houses is quite a bit different than other cities the average gift for our first time buyer in toronto from their parents was a hundred and thirty thousand dollars and in vancouver is a hundred and eighty thousand dollars so the next question is how many people are getting these gifts it's about three and ten so thirty percent of first-time homebuyers are getting these gifts, which means 70% of people who are not getting gifts

likely have an income that is incredibly higher than the average. And what that means is that there is an entire generation of people who are completely frozen out of even the thought of home ownership. There was a survey of Generation Z, 18 to 28-year-olds from Sotheby's Realty, and a full 50% of them said, housing just isn't in the cards for my life. There is no way that I will be able to buy a house in major cities in Canada.

That's how big of a problem it is. How did we get to this point? I hate to draw on my life because I was a young person. It was a long time ago, but let's say 50 years ago. And I wasn't making a lot of money, but I would have been considered at that point, at least in a lower middle class, I was making like $20,000, $25,000 at best a year. And to consider buying a house at that time time you were looking at something that was two or maybe three times more than your annual income today someone in my situation in today's world

is looking at something that's 20 or 30 times their annual income. How did we get to this? It's been a long time coming. We're talking multiple decades of seeing certain trends evolve. So certainly one of the big ones has been interest rates, a progressively falling interest rate environment. Even if your income didn't change, allows you to borrow more money. So that certainly has been one factor. And we're now at interest rate levels that you never would have even imagined 20 years ago.

So interest rates being low, that certainly fueled it. I think another one big factor is what's called the financialization of housing. And that's partly due to the fact that housing has done so well for many generations, coupled with the decrease in interest rates. And people have seen that they've created a lot of wealth. Many generations have done really well. And so there's a huge stigma from older generations to current generations saying, you are not an adult until you buy a home. There's a lot of pressure from society that tells you, you are not an adult until you buy a home. There's a lot of pressure from society that tells you you are not an adult until you are a homeowner. So there's a huge amount of pressure and that drives people to maybe stretch themselves. So people are spending more of their income to even service these mortgages. But to your point, if you ask a

number of homeowners today that have owned for 20 plus years and you ask them, could you afford the house to buy the house that you live in today? And the answer is most likely going to be no. And that is an effect of these these long term trends. So to give you an example of how long it takes to save up a down payment. So let's assume you don't have any assistance. It now takes on average Canada wide to buy a non condo home nine years of saving. But that's Canada wide. If you look in the most populous areas like Toronto, Vancouver, 28 years for the median household income to save up enough to pay for the down payment to get their first home. And in Vancouver, it's 36 36 years so if these trends continue

where income really hasn't seen a huge amount of growth but we've seen house prices continue to absolutely explode we're getting to a point where it will be mathematically impossible for someone to save up for the down payment to buy their first house in their natural lifetime. And so something has to happen at some point because this mathematically, I don't think society would stand for that. Is there evidence of a tension between the generations over this? Yeah, I mean, absolutely. I mean, there's whole advocacy groups that are set up that that talk about the tension between basically the homeowner class and older generations and the next generation so there's one group out of uh the west coast called generation squeeze that just focuses on this and they've got great statistics i highly recommend people check them out but there is this huge tension and it's creating guilt on a number of different fronts.

So, for example, let's say you are a parent, but you don't have significant savings and you just scrape by to get into a house yourself or maybe you are a renter. You can't help your kids and there's a certain amount of guilt with that. are someone who has bought their first home in the last couple of years you're hearing more and more stories of people who are guilty and they're almost hiding the fact that they were able to buy a house because compared to people in their friend circles and the angst that they have about bidding war after bidding war drive until they outside of the city until they can qualify for places that they could actually buy it is a huge generational issue and so if you look at generation y millennials they're kind of on the fence do i or don't i and again generation z they're like forget it it's just never going to happen for those who've who've made that decision it's never going to happen um they're obviously renters um what what is the

value in renting other than you're able to do it one assumes uh but even in some places in well say downtown toronto that even that's not an option for a lot of young people because the rents are astronomical. But what's the upside of renting? So there can be upside. It probably requires as much discipline as home ownership. And when I say that, you know, buying a home requires a big mortgage payment. You've got to pay property taxes, maintenance, and so on and so forth. And it requires a lot of financial discipline, as anyone who has bought a home in the last little while will tell you, because it's a very big cost to be able to afford a home. To be a renter that thrives also requires a lot of discipline. Because what can happen is if you're just resigned to the fact that, well, there's no way I can

own, so I'm just going to be a renter, then if you are not also saving money diligently, you have no sort of forced savings. So one of the arguments with home ownership is there's a forced savings component. You're paying off this big loan over time. So part of your mortgage payment goes to paying down the principal and some of it goes to paying interest. And a lot of renters have been convinced, again, there's this stigma that, you know, why you're paying your landlord's mortgage, why not get your own? But they can't. They can't get into the homeownership ladder. So what do they do? So it is possible to prosper as a renter for a couple of things. One, if you take a look

at the mental health aspect, we are now starting to see more and more people who have climate anxiety and the idea of owning a property in a place where there are more climate events that causes anxiety. Maintenance, they don't necessarily have to worry about to the same degree in terms of these big lump sum costs that can happen at a time, you know, replacing or fixing a roof or fixing a foundation or whatever. If you don't have the discipline to save up and budget for the maintenance required for homeownership as a renter, you might say, well, that's one less worry. But at the same time, again, if you are not saving some money and putting that money aside, even though you're a renter and listen, I've been a renter for the

last nine years and I've done well financially because I've been able to set money aside as well to invest in other assets in the stock market. But as we see more and more sort of investors enter the market, and they become a bigger, bigger share of people who are buying properties, this increased financialization of housing basically means that renters, whereas before you might have been able to find a big difference between what you could rent a property for and what the cost would be to carry it in terms of ownership, and that difference you could, in theory, put away and save into the market. Well, now we're starting to see some real pressure on rents because there is no alternative. There are more and more people in the investor real estate class.

And if they continue to buy more and more of a share of new bills that come onto the market, they have the power to increase rents because you've got nowhere else to go. And to take this further to see where this could go, the city of Berlin had a referendum last year. Now, 80% of Berliners are renters. And there has been a huge financialization there where corporate landlords, private equity firms have bought hundreds of thousands of apartments. And, you know, a single landlord could be in charge of, you know, 50,000 units. So for there, this is kind of what, you know in in canada could look to to the future to see well what could happen if we don't do something about it they had a referendum at the end of 2021 where they asked the city to buy out 250 000 apartments from these corporate

landlords to to basically seize them so that they could offer lower rents to people because that's how bad the financialization has become. So yeah, it's a huge issue. Are we heading in that direction in terms of the kind of buildings that are being built? They're being built for rent. And I ask that because even if you don't live in Toronto, you've probably heard of Honest Ed's, the big store that was in downtown Toronto was very popular for a number of different reasons but it occupied a great block of real estate um when uh when ed died a few years ago they ended up selling off the building the family and selling off that whole block and there's a huge um condo development going in there or they're not condos they're apartments because they're just for rent they're not going to sell them now they're a lot of them are small that's the other thing we haven't talked about i mean they're like really small

three bedroom places in you know in under a thousand square feet um you know 800 square is starting to sound like hong kong you know in a way in terms of of that but is this move to building huge new buildings with no intention of selling them as condos but putting them on the market as rentals yeah and this again i think speaks to the demand of buyers which again are becoming more and more investor buyers and so there's a development just next door to where i live and i signed up as just for doing research to see all right show me the floor plans the pricing and whatnot and they had studio condos starting at it was 286 square feet and there's more and more developments in toronto where you're seeing studio condos being offered that are under 300 square feet this is nothing

right this is you could put a dining room table in there and maybe you have you know space for like one pot you've got one fork, one knife. I mean, this is what you see when you see those on YouTube. You can go and see tours of people's apartments in Tokyo where you open the door and you take one step in and you can basically touch every wall from one spot. And so this is not designed for families. This is designed for investors who want to buy these, who can then rent it out because people have no other choice if they want to live in those parts of the city.

So this again speaks to the financialization of housing. And it's become such a big part of the economy. When you think about, you know, if the average home price is, you know, a million bucks to sell that the realtor commission is 5%. And just as a point, you know, realtor commissions are negotiable in case people didn't realize that. So it doesn't always have to be 5%. It can be lower. But a 5% realtor commission to sell a million dollar home is 50,000 bucks. You add to that's 56 500 bucks this industry of real estate transactions is so big that it's actually believe it or not it's estimated that in toronto one out of every 88 adults in toronto is a realtor right and now not every one of them is doing a lot of deals but you don't even need to. You do one or two deals a year and you're fine. Some people just do it in case family wants to buy homes and they just want to make some extra money. That's how the financialization of housing

has had such a huge impact. And the knock-on effect of this is, because this is a bigger and bigger part of the economy, ownership transfer costs, which are realtor commissions, land transfer taxes, historically are about 1% of GDP. It's now 3% of GDP. So the challenge is if you enact any policy that is bold enough to actually see movement on affordability in the near term, you destabilize the economy. So it's politically unfavorable because the majority of constituents are homeowners to even think about enacting something that would actually address the problem in the short term. Well, let's talk politics for a moment, because usually when these kind of crunch issues come down, the demand is for politicians to come

up with solutions and find ways that, you know, the average person is going to be able to buy a house. Now, I've heard and I know you've heard the theory that this is not really up front on the desk of a lot of politicians because a lot of politicians own their own homes. They're not of that age group where they got to worry about this but that must be changing too right yeah it has to change mathematically over time because as there are fewer and fewer people who are homeowners and people who would want to get into politics because they're passionate about an issue this is going to be one of those issues. It's just not there yet.

I don't know what the stats are, but if you told me that across all levels of government, you know, federal, provincial, municipal, the percentage of politicians who are homeowners was 95%, I wouldn't bat an eye. I would believe that. Until you get more and more people who are at the table and have been renters and as that percentage of the population grows i think that's when you get the political

will to actually enact some policies and in the meantime what i think everyone is secretly kind of hoping but also not is that there's some great recession that resets the table but that's going to be painful too it doesn't seem like there's any good way out of this this crisis for canadians in the short term well ever since house prices have gone up dramatically over these last whatever it is 20 25 years we keep hearing no there's a bubble there's a bubble coming it's going to pop and all everything's going to go down and occasionally there is a you know a flattening of the house market or it drops maybe five or ten percent but then boom it seems to like snap back up in the next you know fairly short period of time so this sort of waiting for you know waiting for the reset you know i

of course if i say there's never going to be a reset maybe there will then exactly be one very quickly but do you think it's still there there is still a possibility that that could happen like a major reset in the housing market or is there just too much at stake um for any for it to be allowed to happen yeah great question um let's put it into context if you had a 30 crash that takes you back what a year and a half right so the level of devastation required in housing prices to create you know uh affordable prices would have to be massive at this point and for that to happen the damage to the economy and people losing their jobs would basically mean that you might be in a position where you've lost your job so even

if prices come down to a point where you could afford it at your current level of income, you might not have that job. So there's that factor. The second one is there's been so many people who have been successfully frozen out of home ownership that as prices come down, it feels like there's so many people who would say, all right, well, now we can step back in. And that would cushion the blow because you have this almost, I wouldn't say endless supply, but there's just, it feels like there's so many people who have given up recently that if prices came down, that would create kind of a floor on prices because they would step into the market and be interested in home ownership again. So I don't know if waiting for some kind of big crash is

the way to think about, you know, home ownership versus renting in the near term. It's market timing. We've been calling the market wrong in housing for 15 years now. And again, it's gotten so stretched that even a 30% crash, it brings you back like 18 months. All right. Last question. This will be the toughest one of the lot. Give me some reason if I'm that woman or that guy or that couple who is saying, I'm never going to buy a house

because I'll never be in the position to buy one. Give them some reason to hope that actually, you know, maybe you will be able to. Yeah, look, it's possible that, you know, the total share of the population that will ever be able to buy a house is going to. I think that is the reality. But there are still people who should continue to save and build up funds in case an opportunity presents itself. And you never know what life is going to hand you. You know, maybe you're single, you're young, and you've got a good job, and you're able to set aside some money. And you don't think that that money is going to be used towards housing. You should still set aside money as part of your emergency fund, as part of your

just general planning, make good sense, buy investments, whatever. And if the opportunity presents itself, maybe it's a life change. Maybe you meet someone and maybe you move, you want to have kids or something like that. You want to at least be in the position so that if an opportunity does present itself, you are able to do that. Because it could be the case that there's some policy that gets enacted that allows for that to occur. Again, I don't know if there's any one policy there's probably no one policy that would reset prices but they may you may start to see more and more programs that are developed to help make it possible to get in on the home ownership ladder so again keep doing what you can in the meantime I know it looks pretty disparate out there right now, and it is.

It is bad. But keep doing what you can. And hopefully, as there is more political will, as hopefully people present policies that can make sense in the short to medium term, maybe there will be something enacted to help you. And as for the long term, I don't know. If you told me that it is possible that house prices start to correct, something is done to address the investor component that puts a chill on access to credit, it is possible that you see a very severe downturn. I don't think it know something you would bank on in the next you know 12 months or whatever it's not outside the realm of possibility but i i wish i could be more optimistic but this is the reality this is why it is a crisis preet's always good to talk to you

really appreciate uh having this discussion um and you know we'll see in which direction things things go but it's uh it's a tough one right now. But thank you. Thanks for having me, Peter. Preet Banerjee. And keep in mind, Preet, who is both a management consultant and a personal financial consultant and advisor, Preet also has a very popular podcast,

Mostly Money is what it's called. And you can listen to Preet's down-to-earth analysis of any number of different situations right there on Mostly Money. I want you to know that this was, I think, a really good overview of the housing pricing situation and especially how it affects young people. But we're going to keep an eye on this as it continues to develop and look for other angles to discuss on it in the weeks and months ahead. So we're not just going to abandon the story because it's a good one. Okay, before we go today, you know how I like to throw in stuff that sometimes are kind of like a personal hobby horse for me. Yesterday we had a couple of aviation stories. Well, today I've got something to give you as well on another one of my kind of personal favorites we'll do that

right after this peter mansbridge back with you from Stratford, Ontario. This is The Bridge. You're listening on Sirius XM Canada, Channel 167 Canada Talks, or on your favorite podcast platform. Welcome from wherever you are listening. Well, as promised, before we go, something a little extra on one of the issues that I'd like to keep an eye on,

and I know many of you do too because you're constantly writing about it, and that's EVs, electric vehicles. We've come a long way in a year about talking about these because I used to start off calling them electronic vehicles, but I've learned EVs means electric vehicles. Well, a couple of stories. Every once in a while, I think at least once a week,

we have something we can tell you on the EV front, and we can do that again on this day. And here is the story for this day. I can is the story for this day. I can just find where I put it. Here it is. It's out of the New York Times.

And this is a real indication of how we're moving ahead on this story, and not that slowly either. It's starting to move quickly. This is a first. Sales of electric vehicles surpass diesel in Europe. So that's a first.

And, you know, Europe was big on diesel. I mean, they've taken a few hits in the last couple of years, as we know, diesel. But for EVs to move ahead of diesel is significant. This is in Europe. More than 20% of new cars sold in Europe and Britain in December. So just last month, more than 20% were powered solely by electricity, according to data compiled by Matthias Schmidt, in a strong illustration of the growing popularity of battery power. Sales of battery-powered cars soared in Europe, the United States,

and China last year, while sales of conventional vehicles kind of stagnated. Sales of all new cars in the European Union fell more than 20% in November as a shortage of semiconductors strangled production, according to the European Automobile Manufacturers Association. Now, as I mentioned, diesel was long popular in Europe because of tax policies that made diesel fuel less expensive than gasoline. This is all in this New York Times article, right? Diesel's decline began in 2015

after Volkswagen's emissions scandal, which called attention to the pollution caused by diesel. The subsequent regulations encouraged carmakers to develop EVs. Okay, so that's one story on the electric vehicle front. Here's the other one. Now, a lot of those of you who write to me on the ev story your two main concerns you're interested you're one of the growing number of people who are saying you know i may not buy another gas powered vehicle however i want to be sure of two things. One, how long batteries are going to last,

and two, where I can charge up my battery. How many charging stations are there going to be? Well, those increase every day, right? The numbers of those. But still, a lot of people worry about that. They worry about it for charging stations in their home. They worry about it for charging stations in big, you know, big condo buildings, apartment buildings. And that's a concern. But the batteries, the battery issue is a big one because, you know, when EVs started, battery life was not long. It's longer now as they develop new batteries, but it wasn't long and people feared,

I can't go anywhere. You know, I'm going to have to charge up every couple of blocks. Well, it was never like that bad, but there was a limitation on how far you could drive without having to get recharged. So in this story in wired magazine the u.s inches towards building ev batteries at home in other words in the states and that's a big deal

for the market in the u.s because batteries are now in such high demand that the industry is headed for a materials supply cliff composed largely of nickel and cobalt. The battery was developed in a U.S. or European lab, but its future is squarely in China, which today manufactures, get this, 90% of LFP battery cells. Battery production in the U.S. is a missed opportunity. This is according to Wired Magazine, and they make a pretty compelling case. Called LIBRIDGE, a U.S. government initiative was formed a couple of months ago after the Biden administration set a goal

of making 50% of new car sales electric, the administration has said the U.S. is putting too much stake in battery technology that could only come from overseas, and particularly only come from China. The battery industry is growing and making partnerships with car companies. So, the word is out there. We've got to get these batteries made at home in America for Americans. So, it's a huge potential industry for those who take advantage of it and some clearly are well what are conventional car companies doing

well there are a lot of them are switching to electric vehicles as part of their package of vehicles that they're offering the public. We know that. But here's something else that's happening that's interesting. And this came out in gizmodo.com. Toyota wants to make its cars last longer by refurbishing them. You know, we're all in this kind of habit of, well, not all of us, but many of us are in this habit of, you know, either trading in or ending our lease after two, three,

at the most four years and getting something new. Well, are we, you know, they're making cars pretty well now, and they have been for some time. You know, I can remember the longest I ever had one car. I bought new in 1979 a Toyota Supra. It's kind of like a Celica, but a sporty looking one.

It was very sporty. I had it for 10 years. I put a couple hundred thousand clicks on it. Never had any major problems with it. But I had it for 10 years, and I think that's the longest I ever had a car. Now I'm kind of, you know, in a situation where it's every, you know, three years,

four, kind of at the most. And I'm not sure why. You know, I like a new car with all the latest technology. That's one. Well, that's what Toyota's saying they're going to do. There's nothing the matter with our cars.

They need to be refurbished. They need to be kind of brought up to speed. And so they're talking about a program. This is just so far in the UK where they're going to refurbish vehicles. Bring them back in once or twice over the life of the car to bring them up to date with everything from new technology

to new materials in their, you know, in the interior. So, you know, things are changing in the automobile industry, which is such a huge part of the economy, especially here in North America, right? So that will be interesting to watch and see develop over time, whether other automobile companies do the same kind of thing. Say, okay, it's not a recall, but bring that vehicle back in. We're going to refurbish it we're going to bring it up to date bring it up to speed it looks great looks like a great car

let's just make it up to date all right enough already it's tuesday wednesday tomorrow smokerors and the Truth with Bruce Anderson. Here's what we're thinking of talking about. And we've been prompted by watching what to us look like pretty strange decisions on the part of our major political parties, all of them, in terms of how they're using social media. Are we missing something or are they missing something? That's what we're going to talk about tomorrow on Smoke Mirrors and the Truth with Bruce Anderson.

Thursday is an opportunity for you to let us know what you're thinking on and whatever. The Mansbridge Podcast at gmail.com. The Mansbridge Podcast at gmail.com is where you write. Friday is, of course, Good Talk, Chantelle Hebert and Bruce Anderson on the events of the week in politics.

And there's lots of them happening this week. All right, that's it for this day. I'm Peter Mansbridge. Thanks so much for listening to The Bridge. We'll talk to you again in 24 hours.