The Munk Debates Podcast - Housing: The Theory of Everything

Episode Date: September 1, 2023

Friday Focus provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving the news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates. The following is a sample of the Munk Debates’ weekly current affairs podcast, Friday Focus. On this edition of the Friday Focus podcast, Janice and Rudyard spend the show talking about housing and how it has become the “theory of everything” in advanced economies around the world from China to Canada. What are the opportunity costs for nations that are making housing an outsized driver of economic growth? How do high housing costs play into social inequality and intergenerational unfairness? And, what are the implications of trying to curb the now multi-decade “financialization” of housing as an asset? Housing is no longer an issue we can afford not to address, but are we prepared for the costs? To access full-length editions of the Friday Focus podcast consider becoming a donor to the Munk Debates for as little as $25 annually, or $.50 per episode. Canadian donors receive a charitable tax receipt. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

The following is a complimentary excerpt of this week's edition of the Friday Focus podcast by The Monk Debates. To access full-length editions of each and every episode, along with all kinds of great additional benefits and perks, become a donor to the Monk debates. You can do that for as little as $25 a year, and you'll receive each and every year 50 Friday Focus episodes at full length. It's all available right now on our website in just a few. simple clicks, triple W. The Monk Debates.com. Look for the Friday Focus option in our navigation bar, the top right of the website. Make your donation, and we will send you each and every Friday a link to listen to the

full-length edition of this program. Thanks in advance for your generous contribution. Hello, Monk listeners. Roger Griffiths here, the executive director of the Monk Debates. Welcome to this, the regular Friday Focus podcast. I'm joined by Janice Gross Stein, the founding, director, the Monk School of Global Affairs, internationally renowned scholar, and author,

Janice, how do we find you on this the 1st of September? This is always morning weekend for me. I know the official end of summer doesn't come yet for two more weeks, but it is always Labor Day for me the day after the world starts to spin at a much faster rate. And I am not ready for that, The show has for better and sometimes worse, I think, for the state and fate of the world, had an active docket of issues and ideas. And this week I want to plunge in on the top of the show to talk about housing.

I've been doing a little bit of writing about this in the hub. That's a kind of associated public policy information analysis project I'm involved with. I know you're thinking about it a lot too. Housing is becoming a hot global issue. So let's unpack this for our listeners. Why don't you take up the global kind of lens on housing? How should we think about housing? What's happening?

Why is it seemingly the tail wagging the dog? And then maybe I can add some color on the Canadian context. It's a global issue, I call it housing as the theory of everything in the global economy right now, which is really astounding when you think about it. In part because, as usual, I'm China watching and we have a glimpse of the future, I think, in the overweening significant, in the Chinese economy of the housing markets. I know you have worried for a long time that housing and everything to do with it is too important in some of our big cities in Canada.

It dwarfs what has happened in China. The data are so hard to get, but it is some people calculate that it is with everything that's associated 40% of the Chinese economy one way or another is associated with housing. And that's because, frankly, every time there's a crunch in the Chinese economy, the Chinese government goosees the housing market. It makes easy money available to Chinese developers to build housing. And China now has the largest number of unfinished and or unoccupied

dwellings of any country. Just think about that as we struggle with a housing shortage. They have a housing surplus. And that has led to a crisis of confidence in the Chinese economy as a whole. It's almost like a virus. People who developers are defaulting, have lost confidence because that was their sole vehicle for saving. They're not spending. The less concerned, the less concerned, spend in the Chinese economy, the more acute the crisis gets, the more the reflex that the Chinese leadership has, build more housing and more infrastructure, even though it's overbuilt. And really, if you wanted a two-sentence explanation of the current Chinese crisis, and I do not share the hype that this is the beginning of the end of China. We suffer from hype in so

much of our analysis, but there's certainly an economic crisis that China's going through overinvestment in housing, using housing to solve all your economic problems. And I think, you know, this is a cautionary tale for policymakers and just the reality here in Canada, because we've taken housing over the course of a generation for, you know, from a pretty modest part of our GDP, you know, four to six percent up now into the high teens or higher, depending on, you know, what you think housing does and how it amplifies throughout the economy. So it's become over the last 20 years, much more significant piece of our economy. Some stats out that are just mind-blowing in Toronto, the city I'm recording from, the qualifying income, so the income that you

need in Toronto to qualify for an average home price. Okay, so this isn't the most expensive house in the market or the least expensive, but the kind of average typical home in what we call the GTA, the greater Toronto area, is $225,000 Canadian. So that means you need to be in the top 10% of income earners in order to qualify for a mortgage. Now, that's just qualifying for a mortgage. You also have to come up, again, to afford the average house in the GTA, a $200,000 down payment. So we've created a scenario here where it's a combination of interest rates. It's not just housing prices. It's high interest rates as we deal with the effects of inflation, which I don't think are going away anytime soon.

We can talk about that at another time, too. But you put this all together, Janice, and I worry that we're starting to get the same. factors that have led China, as you rightly say, it's a kind of vision of the future, into this bigger malaise and crisis around housing. And what are they? I'll just quickly mention too. These high prices, this unaffordability creates a crisis of family formation. Young people simply cannot go about what previous generations do, which is meet their partner, start kids, you know, buy a house. And you could say, hey, maybe they should get over that, skip it.

You can still have kids in a one-bedroom condo. Well, have you tried that? This is a big barrier to family formation. And this has been a crisis in China because young men can't really get married to women unless their family can prove that they have a place to live and a property for that family to start in. And then the second factor is that the record high debt levels that people need to get into in Canada to get on the housing ladder, in turn, suppress

consumption because all their disposable income is going into solving for getting on the housing ladder as opposed to supporting the broader economy. And this is the crisis that China is in right now, that consumer spending has collapsed as debt levels soared. and then as assets soured and housing values fell, those consumers feel even more uncertain about their economic future. So they're pulling back spending even further. That's exactly the trap.

Yeah, I just really worried, Janice, and your thoughts on this. There's no easy answers here, but you know, you kind of say China is a future that Canada really needs to avoid. And right now it looks like we have a lot of the ingredients to recreate the toxic brew that they currently find themselves. That's exactly the trap that you so well described there, Rudyard. I call it the housing trap that comes when housing becomes the chief store of value. That's really the issue. There was a more balanced pattern of savings in Canada where a house was one of your assets, but it wasn't the only, and in some cases, not the most important. Now it's buying a house is the way to accumulate capital intergenerational.

That's what you do. And it's overwhelmingly attractive way for people. So it's not only that you need a house because you want to have family. It's because it's a smart financial thing to do. Why is it smart financially? Because you believe those prices are going to continue to go up forever. Now, first of all, as you, I both don't, nothing goes up forever.

In fact, generally, what goes up comes down. And that's what's happened in the Chinese economy. All these forces were propelling housing prices up until they didn't. And then when they don't, you get that collapse of confidence. And China's spending is in a downward, Chinese economy. Downward spiral now. And for Xi Jinping, just think about it. this, it's a crisis of confidence. That's what it is, really. How do you restore consumer confidence?

Now, we have a different set of challenges here. Because for us, housing is not the crazily dominant part of the economy that it is in China, but it's connected to another really important issue, as you've written about the hub, immigration levels, which is a really important economic issue over time. And Canadians are beginning to tie this together. High levels of immigration, creating more pressure on housing in our big cities, driving prices up out of reach of families who can't afford to buy a house because there's no bottom. Well, if, in fact, as a result of high housing prices, we reduce immigration, which is where the discussion is just beginning to creep in this country. We're doing long-term damage to our economy because we are solving a housing

crisis. That's when you know you're in no good territory, frankly. How do you, how do you, in fact, there's only one way of solving a housing crisis, greater supply. You and I would both agree. Janice, here maybe to give, unfortunately, some of our listeners in digestion, I agree. You have to address supply, but not to think about demand is bizarre. And in the current Canadian context, all of our conversation is about supply. It's not about understanding the entire other side of the equation. And you're right, immigration is part of that. And they're talking, I think, sensibly about cutting back on these hundreds of thousands of student visas,

many, unfortunately, that are going to basically, I would say some almost fraudulent degree mills where these students are horribly exploited and not really provided with an education. But the issue on demand is also about the financialization of housing as an asset and a generation of government policies that have enabled housing to become, as you said, not just one of a series of assets that you develop over the course of your lives, but the sine qua non of the asset that you want to develop. And here's the thing I give people indigestion. I wrote about it and I'll help this week.

You did. I'll include the article in the show notes. I think we need to have a mature conversation about the capital gains exemption on the sale of your principal residence. When this policy was started in the early 1970s, no one envisioned home values being on average 10 times more than the average national income. No one envisioned the Canadian government federally this year spending almost $10 billion of mostly debt and deficit finance public funds to compensate Canadians for the capital gains exemption on their principal residence. One third of Canadians do not own a house, many not out of choice. And they will never have the opportunity because they can't get on the housing last. to benefit from this exceptional tax relief that mostly goes to the upper quintile of income

earners, including a lot of people in the 0.1% who are selling multi-million dollar homes with multi-million dollar capital gains protected, you know, from taxation. This is never what the policy was meant to do, and we have to understand that this is creating intergenerational unfairness. It's creating, as you said, a kind of housing aristocracy in Canada where the children of people who've accumulated these remarkable housing assets are allowed to enter into the housing market, and the children of families that haven't, mostly immigrants, haven't been around for the last 30 years of accelerating housing prices, don't go into the housing market.

I don't know about you, Janice, but part of the reason I like being a North American is we kind of said no to the aristocracy. At least our neighbors in the South had a revolution about it. I don't really want to live in an aristocracy in Canada, and I worry, I'm partly joking here, but I do worry that there's a lot of unfairness here, and a lot of it goes back to the financialization of the asset and the capital gains lifetime exemption. on your principal residence. We need to debate this.

So you're right that you have just given indigestion to our listeners when you raise it. You know, there's two subjects you raise in this country. And oh, wow. The first is the one you just put on the table. And the second is health care. You know, there used to be religion, sex and politics. Now it's housing and health care that you can't talk about at a dinner party. So let me just, let me modify your proposal for a second, which is able to your grandfather,

everybody who has a house now. But going forward, you shape expectations with respect to the capital gains. So housing doesn't become such an attractive financial asset because that's where we've really gone wrong. It is financialized. And when you financialize the place you live in, and that becomes your most important asset, you distort your economy. I don't think there's anybody who would disagree with that, Radyard.

And we're seeing one end of the story in China where our confidence has collapsed. And they did many of the same things. They used all kinds of tax and other loopholes to push money out to home builders in China, to subsidize and allow people to, quote, afford housing. They've done many of the same financial engineering that we've done to create the affordability. crisis that we've now arrived at too. And that's why it's such an important story for everybody to watch, because we're on the other side of that.

But Ken Rogoff, the economist at Harvard, had a great title for a buck. He called it this time it's different. And of course, the book argued it's not different. There are fundamental laws of economics here. And they hold true that when you financialize it, an asset like that. And look what happened in the United States. It just works itself in a different way. We forget that the global financial crisis was triggered off by financialization of mortgages in housing. So this is a really precautionary tale. And as I think about our governments,

and again, it doesn't matter, conservative or liberal, the real trap here is not to allow our housing market to become any more financialized than it is already. There are variations of your indigestion creating proposal, but you're getting in a fundamentally important point. It's skewed, and it's skewed in a very dangerous way. Thanks for listening to this excerpt of the Friday Focus podcast. To get full-length editions of each and every episode of this program, simply go to our website, www. The Monk Debates.com.

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