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The housing bubble could burst any day now … or not

Canada’s housing market  is due for a large correction any day now … and has been for years.

The reality is that nobody knows just when the big downturn is coming, only that it is coming. Or has to be, right?

On the surface, the increase in housing prices can’t be sustainable, especially not at the levels we’re seeing just now. Even in a pandemic, with all the job losses and economic uncertainty, the market is booming. Sure, there was a dip early on, but then the craziness returned … in spades.

We’ve seen some pandemic-related shifts in the market, with people working from home seeking more space. That’s translated into a measurable migration from the condo-ized downtowns of Toronto and Vancouver to the suburbs and beyond, in turn driving up prices even in rural areas.

It’s a trend that’s had an impact on real estate in Waterloo Region, with demand driving up prices, pushing people further afield into still-smaller communities.

Demand is outstripping supply, the latest surge fuelled by FOMO – fear of missing out. As prices rise, some people panic, worried that they’ll be forced out of the market entirely by rapidly growing prices. That demand in turn drives up the price of housing. It’s a vicious circle that seemingly has no end.

Government policy could change things, of course. A large increase in interest rates would cool the market almost immediately. But given the current state of the economy, higher rates would come with numerous costs governments don’t want. But even in good times, our economy is built on borrowing, with Canadians borrowing to maintain their lifestyles – there’s no will to raise rates when it’s borrowed money sustaining our consumer-driven economy.

Moreover, governments are not keen to pay more for the debt they’ve incurred, particularly during the pandemic.

Governments could mandate other changes, such as larger down payments – making the minimum 40 per cent, for instance, would substantially reduce the number of eligible buyers, dropping demand and, thus, prices – or tougher challenges on mortgage borrowing.

The latter was implemented in the wake of the 2008 recession, but Ottawa is moving away from prudence once again, just this week introducing measures to make larger mortgages available to first-time homebuyers in the particularly difficult markets of Toronto, Vancouver and Victoria.

Increasingly, there’s no appetite to save Canadians from themselves when it comes to debt, whether for mortgages, lines of credit or consumer spending.

Established homeowners with little or nothing in the way of mortgage debt are seeing massive increases in the value of their biggest asset. That’s fine as long as they’re not looking to sell in order to move up, as the cost of their next homes would be commensurately higher, too. On the other hand, selling high in the hot GTA market allows some people to move out to the suburbs or smaller centers, seeing their money go much further.

Canadians have long been treating their homes as ATMs, drawing on both the equity they’ve built – some more than others, obviously – and the future equity they think will come as housing prices continue to rise … at least in theory, though we don’t think too much about the possibility of a collapse.

In that regard, the housing market takes on the appearance of a Ponzi scheme. There are many people with the aforementioned FOMO jumping into the market, which benefits existing homeowners who, in essence, reap the rewards of the major risks of those just getting into the housing market.

Canadians have some 75 to 80 per cent of their wealth tied up in their homes – the eggs are essentially in one basket. That’s a risk, but one that grows with how recently they bought their homes and the size of the outstanding mortgage.

Given the long-time boom in real estate, Canadians have seen their net worth double in the past 20 years. Statistics Canada reports median net worth for households hit $329,900 in 2019, an increase of 115 per cent from 1999. Most of those gains went to older Canadians, naturally, based on when they purchased homes versus newer entrants into the market, who tend to be younger.

It’s numbers such as these that help feed the real estate frenzy. Again like Ponzi schemes, there’s a feeling of safe and steady returns, with housing seen as a risk-free investment. There are countless examples to the contrary, but human nature and bubbles often don’t mix.

Governments have shown little willingness to counter the downside of a potential bubble, just as they pay lips service to limiting sprawl while encouraging unsustainable growth with policies from immigration to development. In fact, the housing sector has become an inordinately large portion of GDP, pushing 10 per cent, whereas the number is about half that in the U.S. Policies are adopted to encourage growth, however harmful, to maintain the fiction of economic well-being, just as borrowing is encouraged to maintain the illusion of middle-class prosperity. It’s not sustainable, but that’s a problem for another day … and another government.

(That those most profiting from the current situation – banks and developers, for instance – also happen to be major political donors is just a coincidental bonus.)

Moreover, no politician wants to be seen as blocking the dream of home ownership, a dream fostered by the same forces profiting from the status quo, by the by.

Housing prices have been over-inflated largely by easy credit, a situation the federal government temporarily moved on, but prices continued to rise. There has been some movement on creating more affordable house – rent-geared-to-income projects, for instance – but demand far outstrips supply.

Ontario’s Ford government has targeted planning and growth restrictions imposed by its predecessor as a culprit. Opening up more land to development and easing restrictions on developers would increase supply and, thus, lower costs over time. It’s a dubious assumption, particularly in the GTA where the influx of newcomers will undoubtedly outpace new construction.

Even leaving aside the environmental concerns and the benefits of axing sweeping policy restrictions imposed on all municipalities, regardless of whether or not they made sense locally, there’s every indication we’ll continue to see a pumping of the housing market at the broader public’s expanse – sprawl, congestion, changed neighbourhoods – while government efforts do nothing to make more housing available, particularly the affordable kind.

There’s a gap between increasing housing prices and stagnating wages at the heart of affordability crisis. Nothing will be resolved until population easing dramatically reduces demands and wages grow to close the gap. Or we see a 30, 40 or 50 per cent correction in the vein of what we saw in the U.S. in 2008, when many people learned bubbles can burst, and the fallout comes at a heavy price.

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