Hands off my housing bubble!

Canada’s housing bubble is the economy’s biggest risk—and its biggest driver. Now governments want to cool it down.

In fact, Vancouver recently became Canada’s first “city of millionaires” as rising real estate prices—the average detached home in Vancouver costs $1.5 million—pushed average household net worth up seven per cent to just over $1 million in 2015, according to a recent study by Environics Analytics.

Yet, the majority of Canadians—70 per cent—now own their own homes and have built up enormous wealth, at least on paper. If prices nosedive, it will threaten their prosperity. As if this quandary wasn’t enough, politicians now face an even thornier problem: with the rest of the economy running on fumes, Canada finds itself far more dependent on real estate than ever. The housing sector—and the construction that underpins it—now ranks as Canada’s single biggest industry, comprising 12 per cent of GDP. That figure expands to 20 per cent if related industries like finance and legal services are included, and even higher when you consider the “wealth effect” of steadily rising home prices is also behind everything from sales of luxury cars to designer clothing.

Even economists who once lauded government efforts to cool housing are now expressing reservations about taking further action. “Unfortunately, the pillars of our economy have for too long been oil, manufacturing and housing,” says Sherry Cooper, the chief economist at Dominion Lending Centres. “So if you knock out that third pillar at a time when oil prices are weak, Alberta is in a recession and manufacturing is unable to replace that growth, we would have a very weak economy. There would be fewer jobs and income growth would decline.”

How did we get here? Years of relative government inaction on the housing file are one reason. Failure to grasp the potential impact of foreign money on Canadian real estate is another. But much of the blame falls on the shoulders of individual Canadians. The Bank of Canada warned for years about the dangers of homeowners getting in over their heads. But Canadians brushed off those warnings and loaded up on debt—the average household now owes a record $1.67 for every dollar of disposable income it earns. Meanwhile homeowners steadily ratcheted up their expectations of how much their house will be worth in the future when it comes time to sell it. More than one-quarter of Canadians, by some estimates, are banking on the sale of their home to fund their retirement dreams. They will understandably be furious with any elected official who, in a bid to save homeowners from themselves, inadvertently kicks their golden goose into the abyss.

So, do 70 per cent of Canadians really want to see the value of their homes go down?

It’s also difficult to overstate the degree to which the entire country—both homeowners and renters alike—has become reliant on rising house prices to keep the lights on. Emanuella Enenajor, a senior economist with Bank of America Merrill Lynch, says residential construction is responsible for a full third of GDP growth over the past two years. “It’s the highest we’ve had, pretty much, on record,” she says.

Rising house prices have contributed mightily to the net worth of Canadians, which clocked in at $9.84 trillion at the end of the second quarter, or $232,000 per individual. That, in turn, makes them feel richer and spend more, giving the economy a boost. According to BMO economist Alex Koustas, there’s been nearly a 40 per cent increase in sales of luxury vehicles that cost more than $90,000 over the past three years. Meanwhile, a stampede of high-end U.S. retailers, from Saks Fifth Avenue to Nordstrom, have rushed to set up shop north of the border to take advantage of a large and well-heeled, if increasingly indebted, clientele. There’s been a cultural shift, too. In recent years, Canada emerged as a centre of reality-TV programs focused on real estate, exporting no-nonsense stars like Mike Holmes and the winsome Property Brothers to U.S. audiences.

The number of people working as real estate agents in Toronto alone has doubled over the past decade to about 40,000. “Canada doesn’t have a lot of hard, timely information on this,” says Enenajor. “But real estate has been one of the best-performing sectors of the economy from a price and activity perspective. It would be naive to say this hasn’t had an impact on people’s choice of what kind of business they’re setting up, or the types of employment opportunities that people are pursuing.”

Governments are also held hostage. B.C. recently noted that the $2.2 billion it took in from real-estate-related taxes last year was more than it received in royalties from the mining or forestry industries. It even outstripped revenue from gambling!!!

It’s unfortunate that Ottawa didn’t take more assertive steps to bring the housing market to heel back five years ago when Canada’s economy was still the envy of the world. Now, the country finds itself in the unenviable position of having to explore untested and ever-riskier measures—B.C.’s move to discourage foreign buyers is a good example—to cool house prices at a time when GDP growth is limping along at just 1.2 per cent. “It would be a very bad thing if foreigners were to sell properties in Canada, because all of us—homeowners or not—would experience a very significant slowdown in the economy,” says Cooper, who worries governments are being motivated more by political promises to help the middle class than they are by sound economic judgment.

Of course, that assumes the middle class actually wants to be protected from rising prices. Roy, the Vancouver agent, isn’t so sure. “Everybody believes in affordable housing,” he says, “until it comes time to sell their house.”

Are you looking to buy a property? If you like, I can tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much I could save you right now if you have an existing mortgage.

Until next time,
Your mortgage expert Evgeny Kamenskiy


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