Great Canadian Housing Bailout: How high prices are being propped up

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For a brief, shining moment in the spring of 2022, it appeared that some semblance of sanity was returning to the most unhinged real estate market in the world.

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The COVID-19 pandemic had taken Canada’s already-overheated housing prices and bid them up to meteoric heights. And now, finally, the “correction” was happening; a downward plunge that would not stop until a Canadian earning a normal wage could once again own property without the help of a windfall of inheritance.

But the moment is over. The price drops slowed, the unaffordability ratchet held fast, and untold millions abandoned their last lingering hope of owning their own home. Real estate publications praised the country’s return to “normalcy” although normalcy, in this case, referred to annual double-digit spikes in value that remained wholly detached from local economic conditions.

Only a year later, it’s happening again: Under normal conditions, a central bank hiking interest rates to 4.75 per cent would be expected to send housing prices into a slump. But almost everywhere, real estate professionals are confident the juggernaut is going to continue. In its official reaction to the higher rate, a spokesperson for the BC Real Estate Association said prices would remain “extraordinarily resilient” and that the higher rates would probably not “make that much of a difference.”

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As per usual, at the core of both events is a latticework of government policies that seem tailor-made to hold the line on unaffordably high real estate prices. This is the story of the Great Canadian Housing Bailout.

In an April Ipsos poll, a record 63 per cent of Canadians not already in possession of a home said they had “given up” any hope of owning one. As of the most recent numbers from the Canadian Real Estate Association, the average price of a Canadian home has bounced back to $716,000. Even adjusting for inflation, that’s nearly three times higher than the average Canadian home price in the year 2000.

And yet, when finance minister Chrystia Freeland tabled the 2023 federal budget in March, one of the most remarkable things about it was the fact that it didn’t have a single policy designed to increase the overall housing supply.

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While prior budgets had at least paid lip service to the notion of bringing down real estate prices, the new measures in Federal Budget 2023 were focused entirely on the demand-side of the equation. The government would not be making homes more affordable, but they would be making it just a bit easier to bid up the homes that were already in place.

There was the Tax-Free First Home Savings Account, which would allow Canadians to stash away $40,000 for a downpayment, tax-free. Tax credits were increased for first-time homebuyers. Millions of Canadians were also just straight-up handed an extra $500 through a one-time expansion to the Canadian Housing Benefit.

“Canada’s 2022 budget is already trying to bail out real estate by creating demand,” declared an analysis by Better Dwelling.

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The budget was tabled at a time when rising interest rates had begun leaving overleveraged real estate investors in the lurch. Borrowers who had maxed out their credit at historically rock-bottom interest rates are now facing the default.

In Metro Vancouver, this even led to absurd scenes like wealthy lawyers organizing demonstrations to protest against having to pay “outrageous” interest rates on their real estate portfolios. “Stop discriminating against homeowners,” read a placard at one such protest in Surrey, BC

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But in her budget, Freeland seemed to hint that these protesters had a point. The document said that the government would be encouraging banks to extend “fair and equitable access to relief measures.”

One of these relief measures is the extension of amortization terms. In recent months, all of Canada’s big banks have reported a vast expansion in the number of mortgages on their books with amortization periods of 35 years or longer.

For borrowers, that means their monthly payments go down, but they have to keep paying them for an extra 10 to 15 years.

Either way, the effect is that Canadians are able to handle larger amounts of credit, which is further increasing the amount of money available to bid up prices. What’s more, it’s rewarding the ranks of overleveraged real estate buyers who helped bid up the market in the first place.

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Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, hasn’t been the first to notice that all these extended amortizations are terrible for housing affordability.

In a May letter to the House of Commons Standing Committee on Finance, the regulator said that one of the easiest ways for Parliament to bring down real estate prices would be to ban banks from doing this.

“Removing the ability to extend amortization periods could exert downward pressure on some house prices, as it reduces the options available to help some borrowers meet their financial obligations,” it read.

And overarching everything is the fact that Canada is ratcheting up immigration to unprecedented levels. In 2022 alone, one million new people come to Canada, the direct result of a stated push by the Trudeau government to increase GDP by significantly dialing up immigration intake.

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The last time Canada was taking in these immigrants quickly, they were mostly being sent to homesteads in the newly settled prairies where they were expected to build their own homes. This time around, Canada is bringing in a Nova Scotia-worth of new people every year and expecting them to find places to live within the existing housing stock.

In January, University of Calgary economist Arvind Magesan told the National Post in an email that, given current conditions, it’s “hard to see” how the current state of Canadian immigration policy would not be piling pressure on top of the already stressed real estate market .

“I would like to hear a counter argument to this (but) I don’t see one,” he said. “And I say this as a proponent of immigration for both economic and philosophical reasons — we need immigration for other economic reasons.”

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The core problem in Canadian housing affordability has always been a simple scarcity of homes. Foreign capital has played a part in judging demand, but there’s no escaping the fact that Canada has developed the most acute housing shortage of any other country in the G7.

In a report last June, the Canadian Mortgage and Housing Corporation estimated that it would take the construction of 3.5 million more homes to return Canada to the level of affordability last seen in 2003, one of the last years in which it was still technically feasible for a household earning an average income to afford a home in a major center such as Toronto or Vancouver.

And it’s this factor that remains the most reliable bulk propping up Canadian real estate unaffordability. Strict municipal zoning laws ensure that it remains illegal to build anything but a single-family home within the boundaries of hyper-stressed markets like Vancouver or Toronto. Any attempt to densify in the face of existing zoning restrictions is likely to encounter an odyssey of red tape and public hearings.

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View Royal, a municipality within BC’s Greater Victoria region, recently announced that it was going to stop considering any rezoning proposals whatsoever for the next six months. Greater Victoria had just become one of the country’s most expensive housing markets, immigration was reaching record highs and even after repeated annual rents increased of as much as 20 per cent, the regional vacancy rate still stood at nearly zero.

But according to a resolutionall these factors took a back seat to the municipality’s need to take an extended break to “ensure that all development initiatives align with the long-term goals and interests of the community.”

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