Housing: where we are headed, and why
As I take possession of my new home in the red hot Moncton, New Brunswick market, where values have more than doubled in five years, I am left to contemplate where housing prices are heading — and why.
After the 2008 housing crash, the housing market across North America not only rebounded, but exploded. Since I sold my home in Guelph, Ontario, in 2010, it has roughly tripled in value. The purchaser was my immediate neighbour, who wanted to expand his rental portfolio. It was a sign of what was to come.
In the years following that crash, enterprising people made themselves spectacularly wealthy by buying up the cheap foreclosed houses left vacant by the sub-prime crisis.
Many people — too many people — have figured out that the easiest path to wealth is through revenue property, to the point that buying entry-level apartment buildings, for example, is no longer economical. So sure of success, people are buying revenue property with capitalisation rates below their interest rates, banking on their increasing resale value to grow their net worth, which requires constantly increasing rental rates.
Some are taking this too far. A few days ago, the Toronto Star published an article entitled “Toronto-based developer that vowed to buy up $1 billion in single-family homes plans to add 10,000 more houses to its portfolio”.
Between the corporatisation of residential housing, and the advent of AirBNB, the average working person is having more and more trouble affording a home. We often hear that housing supply is low, driving up prices on simple supply-and-demand market economics.
I have trouble believing that is all there is to it. When individual businesses are looking to buy up entire cities worth of property to rent them back to their owners, who are being driven out of the market by rising prices, it becomes a runaway reaction. Large investors, both foreign and domestic, are not renting a room or an accessory apartment in their home to “help with the mortgage”, which I believe is fair game as it genuinely adds housing supply, but rather are depriving the market of housing affordable to the average working family. And no doubt many use vacant units in cheaper markets as tax write-offs against profit in higher value markets.
The Bank of Canada incorrectly interpreted the rapidly rising costs of housing and basic necessities as inflation driven by burgeoning consumer debt — but the burgeoning debts of people are based on the high costs of housing. To cool the market, they rapidly increased the Bank of Canada overnight lending rate from 0.25% to 5% — a factor of 20%, making even Uber’s surge rates blush.
As people who bought houses or refinanced their homes at the 2% rates banks were offering when the banks could borrow at 0.25% face renewals across the country over the next year, people are going to be finding that their mortgage payments are going to become totally unaffordable.
Many believe this will lead to a housing crash or a market correction as people try to sell their homes by the millions when they realise they cannot afford to finance their homes at those current rates. Many will refinance into longer mortgages with similar payments, putting themselves in situations of perpetual debt.
But the problem is that the crash won’t happen to the extent people believe and it won’t resemble the 2008 housing crash, because this time the vultures are already airborne and know where to find the corpses.
Companies like the one noted above from the Toronto Star article are waiting for this moment. As properties are desperately put up for sale against the backdrop of unaffordable interest, corporate landlords will scoop them up in vast quantities, forcing the owners to become tenants in their own homes.
If you are looking for a solution from your federal politicians, look somewhere else. The Maple has done the data and found that at least 128 of Canada’s 338 Members of Parliament are involved in real estate as an outside activity, including members of every single party in the House, even the NDP, the Greens and the one independent. Never mind the ethics of Members of Parliament having outside income — a subject for another day — it will be hard to convince parliamentarians to address a crisis that will adversely impact their own net worth, their income, and those of their financial supporters.
While some economists believe the Bank of Canada will try to get ahead of the looming crisis by rapidly lowering interest rates, even if a bit late, I believe there is a fundamental misunderstanding of the objective.
In 2003, Murray Dobbin wrote a book called “Paul Martin: CEO for Canada?” in which I was introduced to the concept of ‘workforce flexibility’.
A flexible workforce is one that needs work rather than one that wants work. The workforce becomes “flexible,” so that the business owners can have the best talent or labour for the work they need doing. A workforce that is too wealthy, that does not need work, is not flexible. They have an independence that is not necessarily beneficial to those who need them to work. It is the very core of neoliberalism.
What do we call a workforce whose flexibility is the objective, who must rent from their own bosses for their very survival?
We call it feudal society, and we are slowly but surely headed back in that direction.