Residences in downtown Squamish, B.C. The average home in British Columbia costs $1-million.DARRYL DYCK/The Canadian Press
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
Economists choose their words judiciously. That is why National Bank of Canada’s June Economic Monitor report is notable.
The authors say Canada’s largest real estate market, Ontario, is in “disarray.” In British Columbia, the market is “struggling.” Nationally, it “continues to slow.”
Canada’s housing problems are worsening. Federal Housing Minister Gregor Robertson, when asked by a reporter in May if home prices should drop, was clear: “No, I think we need to deliver more supply, make sure the market is stable. It’s a huge part of our economy.”
His words left many scratching their heads, including Mike Moffatt, an economist and the founding director of the Missing Middle Initiative, a project based at the University of Ottawa’s Institute of the Environment.
“It’s simply not possible to restore broad-based affordability to the middle class without prices going down,” he told The Canadian Press.
For homeowners, borrowing money is easy. But how do renters borrow money?
So why the Housing Minister’s emphasis on price stability? Ottawa does not want to trade one crisis, housing affordability, for another, a middle-class retirement disaster.
Cheaper homes are the obvious solution to Canada’s housing crisis at first blush, a point made in these pages by The Globe and Mail’s editorial board. Increase supply to meet demand, and prices fall. Over the last 20 years, home prices to income ratios have risen over 70 per cent, as supply stalled while demand intensified.
Ontario’s Building Industry and Land Development Association’s recent data paints a picture of what “disarray” looks like. New home sales in the Greater Toronto Area are “87 per cent below the 10-year average.” Based on that average, GTA new home sales should have been about 2,750 in May. Instead, new home sales came in at 345.
Dr. Moffatt has helped define what should be affordable for Canada’s middle class using the country’s National Housing Strategy Act: “Any young middle-class family should be able to afford a 3-bedroom home in any community.” Such homes are almost always ground-orientated, single-detached, semi-detached or townhouses.
What sets these homes apart, according to Dr. Moffatt, is that “only the growth of ownership-based homes with three or more bedrooms is strongly correlated with the population growth of children under the age of five.”
Two decades ago, a young middle-class family in B.C. or Ontario typically spent 40 to 45 per cent of disposable income on such homes. Today, the number is roughly 60 per cent, according to Canada Mortgage and Housing Corporation.
Prime Minister Mark Carney’s housing plan, promising billions in financing and building 500,000 new homes a year by 2035, leaves to the imagination exactly what types of units will be constructed.
If Mr. Robertson is to be believed, the vast majority will not be ownership-based, three-bedroom or more, ground-orientated houses that can accommodate middle-class families with children under five. They would undercut the pricing on similar existing homes.
The real reason housing got expensive, and why it will get cheaper
For young and older homeowners, equity from the future sale of their houses is the critical piece solving their retirement puzzle. Only 38 per cent of the current workforce has the benefit of an employer-registered pension plan, with most being dependent on their own resources. Yet, less than 40 per cent of Canadian tax filers contribute to a registered retirement savings plan or tax-free savings account.
Canada Pension Plan and Old Age Security payments won’t suffice. The average CPP monthly payment is about $900 at age 65, while OAS is essentially meant to assist the poorest seniors.
Today, and for much of the last decade and more, many middle-class Canadians have been saving for retirement through their mortgage payments. The expected payout comes when they sell their homes and use all or a portion of the equity to generate passive income for retirement.
In B.C., where the average house price is about $1-million, and Ontario, where it is roughly $860,000, a dramatic decrease in prices of 40 to 50 per cent is needed to restore affordability, given the median after-tax household income in Canada is $70,500. But this would cut retirement income by thousands annually for homeowners depending on their home equity to finance their later years.
To maintain price stability, Ottawa is counting on a strong future economy to boost incomes and close the affordability gap. Dr. Moffatt’s research suggests that could take roughly two decades or more to produce results.
Canada’s Housing Minister has to make a Sophie’s choice on housing, as he faces two evils. The first is an affordability crisis keeping young families out of the market. The second is a future retirement crisis for homeowners vulnerable to price shocks because they have all their financial eggs in a real estate basket.
Mr. Robertson’s emphasis on market stability suggests he has chosen to save many existing homeowners from a future in which retirement marks a quick descent into poverty.