The guy who runs Generation Squeeze says building more homes isn’t enough to lower prices, because most people buying houses are already property owners. Property owners can either sell their current house to get a load of cash, or borrow against it to get a load of cash. Either way, they can pay a lot for their next property.
As evidence, he mentions that Alberta has less supply per capita than the rest of the country, but house prices are half those of Ontario and BC.
Here are the good bits:
While building more supply is absolutely important, setting ambitious targets does little good if property values continue to rise. Unless they are deeply subsidized by tax dollars, new market units will price in today’s high land values – which have soared well beyond what most can afford with local earnings whether the new homes are intended for renters or owners.
Plus all the focus on “Build! Build! Build” ignores that lack of supply isn’t the only, or even primary, factor influencing the price of rent and ownership. You could be forgiven for thinking otherwise, since undersupply has become the dominant narrative shared by Canada Mortgage and Housing Corp. and a variety of financial institutions.
The Bank of Nova Scotia, for instance, published reports lamenting that Canada has a smaller number of private dwellings per capita than the G7 average, blaming this ranking for much of our unaffordability problem. This leap in logic begs questions, since the same Scotiabank data also show that Alberta has lower levels of housing supply per capita than most other provinces, yet home prices in Alberta are about half as expensive as those in Ontario and B.C.
…
Mr. Pomeroy [who published a study about this stuff] encourages us all to widen our focus to include the vicious cycle by which rising home prices drive rising home prices.
First-time homebuyers are a minority of purchasers. They compete with many Canadian buyers who have already owned in the market. Bolstered by the equity they’ve gained from surging home values, existing homeowners bid up the price of housing to levels that are disconnected from earnings paid by local jobs. This was especially true prior to recent interest-rate hikes, because historically low interest rates made it cheap for homeowners to liquefy wealth windfalls created by skyrocketing home values.
Some homeowners bid up the price of housing simply to relocate. Others do so to purchase an investment property in search of additional wealth windfalls.
The latter are among the one in six Canadian homeowners who own multiple properties. Most are over the age of 55. To pay the mortgages on their investment properties, they increasingly collect rent from younger residents with dashed dreams that a good home should be in reach for what hard work can earn.
This reveals that the vicious cycle by which those enriched by high home values bid housing costs ever higher isn’t just ruining the market for aspiring owners. It is also breaking the rental market, as confirmed by the record-high rents reported this summer.
To disrupt this vicious cycle, political leaders must help break Canada’s cultural addiction to rising home prices by endorsing the plan that governments will use all available policy tools to stall home prices for the foreseeable future.
Allow only first time buyers with no other properties to access the new development.
None of the donor class want prices to come down. They won’t be able to price gouge as landlords and the middle class will run out of credit to buy their products.
I feel like it affects a lot of people who want to trade up: sure they can sell their house for a lot more than they bought it, but houses are so stupidly expensive, that they still can’t afford anything nice in their area. Unless they have a great income or are willing to take on debt.
While I understand the views of this article, I don’t believe it. It’s true that if we build 100k homes in each province, it’ll do little to dent housing prices. We don’t need 100k new homes, we need like a million in each major city. People keep talking about how big of a deal building a few thousand homes are, but they’re literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
And while I agree that not everybody would be looking to get their own personal house, increasing housing would vastly let up the pressure on rentals as well. And making rentals cheap enough that you could get one while working part time as a student would also mean that the moment you get a full-time job, you’d have the free time to do everything you could want to improve your life. The fertility crisis we’re having wouldn’t be such a big deal either, not to mention all the stress the young are dealing with since they know that moving out of home before 30 is a pipe dream for most of them.
People keep talking about how big of a deal building a few thousand homes are, but they’re literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
I think that’s the gist of the op-ed - we’re unwilling to build enough houses to flood the market and lower prices. So we need to deflate prices in other ways.
No I think the op-ed is trying to say that no matter how many homes we build, it won’t matter because those who already have homes can just leverage those homes to take on loans to buy more homes, preventing those who don’t have them from actually buying homes since they’re always at a deficit compared to those who are effectively already rich.
What I’m saying is that if the supply of homes increase by something like 40% across the board, it won’t matter if many of these people buy a second or third home, as it’s not like every person with a house is going to buy more. And even if they do, they’ll resort to renting them out because a home they’re not actively using is nothing but a cost that has a high chance of costing more than anything they can sell it for in a few decades due to property taxes. If they do rent them out, they’ll be competing with a massively increased rental market, lowering prices or else dealing with property that is costing money rather than making money.
A net win even if everything this person says comes true. And if it doesn’t, we have a massive influx of homes that’ll push down prices. The only issue is that we’ll be dealing with a new and long term recession as the retirement plans of millions go out the window. It’s a risk but taking this risk is the only way to prevent this problem from increasing perpetually, or else the housing prices crashing due to the bubble popping anyways.
So we need to deflate prices in other ways.
You can’t redistribute your way out of a shortage.
In Canada there are 15m private dwellings and 38m people.
That’s one house for every 2.53 people.
I have 5 people in my house (wife, 3 kids)
I think there is plenty to go around and it’s not a shortage thing.
The average Canadian household is less than 3 people due to high rates of single child households and high divorce rates. That leaves quite a few families of 3-4 occupying 2 different residences. Not to mention all the single people who have their own place but are looking, then all the younger people who are past 30 yet still haven’t moved out of their parents places because they have no hope of affording their own home within 100km of where they already live.
You are an exception amongst exceptions. Not only are you still attached, but you have more than 2 children. And while divorce rates aren’t nearly as bad as some would perceive, the rates of families with more than one child, and especially more than two, are so dismally low that the official fertility rate of Canadians is currently at 1.484, with a ton of that being bolstered thanks to immigrants.
increasing housing would vastly let up the pressure on rentals as well.
The elephant in the room is that the housing market crashed in 2022. Rent is high right now because nobody wants to buy into a crashed market. If you have somewhere to rent, why would you buy right now? The dead cat bounce we’re watching might trick a few people, but on the whole? Houses will almost certainly be a lot cheaper in another year. It took around three years to find the bottom when the US housing market crashed and it is likely we’ll see something similar.
So, by the same token, what incentive is there for someone to build new units right now? Once the housing market finally does find the bottom those renters are going to start thinking about buying again. The rental boost is only temporary and likely to be gone by the time you get around to building something new – something that cannot happen overnight.
I was looking at the numbers, and while I agree to a certain point (if prices are going down, it’s better to rent and hope that prices will continue going down so you can buy at the best price possible) but prices have shot back up since the last year and are almost at the 2021 prices in the span of a single year. We had a temporary dip in prices, not any form of a drop.
And as for incentive, there’s a massive amount. With prices as high as they are, it’s entirely a seller’s market, and if you can make more homes, you basically have as much cash to take as you have homes to sell. The issue is that builders aren’t able to build new homes due to legislation, zoning regulations, and plenty of other hurdles placed. I keep seeing so many properties that have “we are planning to build this skyscraper condo here once we have our permit” and the old building just sits there for 3-5 years before they get their approval.
but prices have shot back up since the last year
They did shoot up, but then started to fall again. A class, textbook perfect, dead cat bounce. The surest sign of all that the market has crashed.
With prices as high as they are, it’s entirely a seller’s market
It’s not. Because people are reluctant to buy into a crashed market, there aren’t many to sell to. High prices does not mean a seller’s market, that just means that sellers want a high price. Housing is notoriously sticky. People can sit on properties for years at a time in hopes of getting a high price. Generally speaking, people buy houses for the long term, so they don’t need to sell them any time soon.
That might change as more and more mortgages start to get renewed. If you can’t afford a property anymore, that becomes a good reason to get a deal done as fast as possible. But a lot of people are still enjoying low interest mortgages, and the rest were stress tested into a mortgage they can still afford even with high rates. Again, there isn’t much pressure to sell for a low price right now. One can just keep the house on the market indefinitely to see what happens. If nobody buys, oh well?
Eventually a reckoning will occur when people start to realize the high price they want isn’t going to happen, and will eventually start to settle for low offers, but that can take years to play out.
The issue is that builders aren’t able to build new homes due to legislation, zoning regulations, and plenty of other hurdles placed.
An even bigger problem was that there weren’t enough builders. Anyone building houses was booked up for years at a time. Even if there were no hurdles, there wasn’t the people to get the job done. Higher wages would have been needed to get more people interested in construction work, but that would mean an even higher cost of housing.
That isn’t the case anymore, though. Many home builders are now looking for work. New home starts have cratered. Nobody wants to get involved in a crashed market – hence why rent has skyrocketed.
Hmm…looking closer at the stats, I suppose you have a point. The number of sales are definitely down, even if only marginally. Though the prices of property is going up, it’s not by as much as the drop in total sales.
While I refute that this is definite proof that the bubble is deflating (hopefully not bursting) I’ll admit that it is evidence pointing towards that as long as the trend holds in the grander scheme of things.
I’ll refrain from saying more until we see how the numbers move once interest rates drop back down, as I believe this is one of the biggest causes for the drop in home sales at the moment. Home prices were out of control back when interest was only 0.5%, so it’s a given that the market would cool off when it’s ten times that.
Honestly, I hope you’re right and this’ll mean that housing will cool off and slowly reach a decent level, but I doubt we’ll get it that easy and we’ll be dealing with a crash with the economic fallout going with it while still having a massive housing shortage a decade from now.
Here’s my proposal on what to do:
-
Implement the Ontario HATF recommendations in every province. These are various recommendations on how to remove powers from municipal and provincial governments to block housing development. They’re a massive project of upzoning. No more “tearing down a home to build a million-dollar mcmansion” when that lot could support a low-rise building of like 6 $400k homes.
-
Adjust processes for colleges, apprenticeships, and for immigration to get more home-building contractors like electricians, plumbers, etc.
-
Open the greenbelt, but only for transit-serviced ultra-high-density construction. You can build on farmland if you’re going to build Manhattan. We have enough sprawl.
-
Create a crown building corporation that funds rental construction with a specific mandate to keep vacancies above some fixed percent in every major market, like how the BoC has a mandate to keep interest below X%. Rent is skyrocketing because there is no vacancy - every unit with a reasonable price gets dozens, even hundreds of applicants. This org would be particularly important in moments of high-interest rates when it’s not as profitable for the private sector to build homes.
-
Read your Henry George. The housing analog to the carbon tax is the Land Value Tax. The idea is that people should be taxed for what the land they own is worth, not for the property they own is on it, because the land is provided by Canada itself. So if you’ve a vacant lot or a parking lot or a single-family-detached home in a hyper dense urban space with transit access, you’ve got a hard cash incentive to find the best use for the land instead of leaving it fallow. Of course, the downside is this would mean throwing Grandma out of the house she’s lived in for her whole life, which is political suicide, so only make it apply to investors as an alternate to property taxes (use whichever is higher), with it calibrated that it’s only a tax on investors if their land is underused. If you own a high-rise in the core or a rural house? Well, that’s realistically all that area could support, pay normal property tax.
Or just tax speculators. 30% of Canadians are hoarding properties. Force them to sell. It’s not complicated.
Define a speculator. Is the company that owns an old purpose-built rental highrise downtown a speculator? What if a building like that gets renovated into condos, but somebody buys up like a quarter of the units? How about the student houses in my neighborhood? Without those student houses, those students would not have a place to live - they are not in the market to buy housing.
-
Here are some of Generation Squeeze’s suggestions for improving affordability. Here’s one that’s interesting:
The first step is putting a price on housing inequity by adding a modest surtax on homes valued over $1 million. This surtax will apply only to the top 12% of high-value homes – the vast majority of Canadians won’t pay a penny more. But it will help slow down home prices so earnings have a chance to catch up, demonstrating allegiance to the Canadian dream that a good home should be in reach for what hard work can earn.
That does nothing for the prices at the low end, and it keeps most landlords happily in their current (extremely high) rents. What hope do middle and lower class people have to outbid the rich for the same houses?
Wouldn’t this negatively impact people who bought their homes at a much lower price when it was affordable and whose home has since increased in value to 1mil+
They bought a house, not an investment.
If they did buy it as an investment, well, they certainly should learn that investments aren’t guaranteed, and that anyone promising that should have a watchdog alerted on them.
While I don’t disagree, I dont see how it helps anyone else? Only sounds useful if it’s exclusively on owners of multiple properties
Am I missing something?
If they bought their house to live in they won’t have a problem.
If they bought it because they wanted an investment that would appreciate in value, they knew the risks.
We haven’t been in a stable market for the average person in over fifteen years.
I just can’t muster up pity for the people who want to hold other people back just because they bought early.
It’s that same pity which allowed flippers and investors to put us in this position to begin with
