One year into the pandemic, Canada’s housing market is surging at its fastest pace in years owing to desperate speculation, emergency COVID-19 measures and a massively-unequal rise in savings—none of which are guaranteed to last.
The unexpected price surge
Since 2008, analysts have warned Canada’s housing market is due for a bust. In 2019, an IMF report noted housing price increases in Toronto, Vancouver and Hamilton are “overvalued” by up to 50 per cent based on income growth and debt-to-income standards. Its report warned “Canadian households are much more leveraged than in the past. This increases their exposure to shocks to income, unemployment, interest rates, or house prices correction.”
Last spring, regulators anticipated COVID-19 would spur that correction.
In a May 2020 testimony, Canada Mortgage and Housing Corporation CEO Evan Siddall warned the COVID-19 crisis risked tipping Canada over a “debt deferral cliff.” That, Siddall warned, would drive household debt to 130 per cent of GDP, push 20 per cent of mortgage holders into arrears and drive up mortgage defaults to $9 billion. “The combination of higher mortgage debt, declining house prices, and increased unemployment is cause for concern for Canada’s longer-term financial stability,” Siddall warned.
Yet, over the past year, data by the Canadian Real Estate Association finds house prices rose 13 per cent. That’s before, BNN reported, house prices rose at their fastest “one-month clip” since 1989. The Financial Post reported Canada has only 1.9 months worth of housing inventory available—the lowest on record.
RBC Capital Markets senior economist Robert Hogue noted the price rise is largely even across the country. “Typically housing markets are really kind of working in isolation relative to other parts of the country, this time it’s all synchronized, very hot everywhere,” he said.
BMO Senior Economist Robert Kavcic told CTV, further, the rate of increase is accelerating. “The 1-month change is faster than the 3-month; which is faster than the 6-month; which is faster than the 12-month,” Kavcic noted. “If you look at the last three months, we’re pushing gains of 30 or 40 per cent.”
Condos also entered the “frenzy.” In Toronto, 41 per cent of condos sold in February sold above asking price. And in Vancouver, overall condo sales are up 74 per cent. Most of these purchases were reportedly by investors and prospective landlords.
The frenzy has led some to dismiss warnings Canada’s housing market is due for a crisis.
Former Bank of Canada governor Stephen Poloz, now a private business consultant, told BNN the risks are exaggerated. “We have really good rules around mortgage lending, and we have excellent banks that know what they’re doing.”
The Financial Post, meanwhile, accused the CMHC and other pessimistic bank forecasters of “herding behaviour.”
Some real estate investors denounced Siddall and the CMHC with stronger language for scaring away new prospective buyers. That prompted a “mea culpa” from Siddall. “I’ve been taken to task for pessimistic housing forecasts last spring,” he wrote. “We never pretended to have a crystal ball.”
Rising speculation and the ‘melt up’
Soon after, former Merryll Lynch economist David Rosenberg called Canada’s housing market “one of the biggest bubbles of all time.” He noted, further, Canadian house prices are 40 per cent higher than in the US.
BNN reported signs are also emerging increasingly that the surge owes itself in part to speculators responding to higher prices by driving prices higher. “Signs have begun to emerge of speculators driving some of the demand, along with other buyers worried they’ll miss out from the boom.”
Bloomberg reports, for example, six per cent of all houses listed for sale in Toronto’s suburbs had been bought in the previous 12 months, up from four per cent from last year. Bank of Canada Deputy Governor Lawrence Schembri told BNN, “You have these fundamental forces that are initially causing house prices to increase and then they sort of take a little of a life of their own.”
This surge closely-follows a further reported increase in residential investment to 9.43 per cent of Canada’s GDP in the third quarter of 2020, up from 7.71 per cent. Pre-pandemic, housing wealth was already deeply unequal. The top 20 per cent of Canadian households owned 63 per cent of Canadian total real estate net worth (assets minus mortgage debt), while the bottom 40 per cent owned just two per cent of the same. Properties that are not principal residences were more unequally distributed; the top quintile owns 81 per cent of the net worth here. More-recent statistics show this trend has only been exacerbated.
Others linked the rise in house prices to cheap money—promoted by the Central Bank to ease the crisis—that isn’t going to hiring or productive spending.
“The housing market is on fire, and there doesn’t seem to be anything to put out the fire,” BMO senior economist Sal Guatieri told Bloomberg. “We’re spending a lot more keeping a roof over our heads than we are on machines and factories and AI. A much greater share of our economy is now devoted to residential construction as opposed to non-residential structures, or just straight spending on machinery and equipment. That fundamentally is not healthy.”
As the Post noted, through 2020, residential investment rose to 37 per cent of total investment. Meanwhile, last year, workers were laid off, and spending on new machinery, equipment, and IP fell to 28.2 per cent—its lowest level since 1993, and more than five per cent lower than its peak.
According to the Globe and Mail, the price surge may be a “melt up,” a speculative frenzy typically seen at the end of a bubble, that may be a global trend. The Financial Times called it the “everything rally” as central bank efforts to flood markets with cheap money aren’t prompting new hiring and productive investment but rather driving speculation on junk bonds, energy stocks, hotel stocks, airlines and even Bitcoin.
Warnings that Canada’s housing market is due for a crash are occasionally dismissed with claims that Bay Street is more “responsible” than Wall Street was leading into 2008. The differences are significantly exaggerated, as evidenced by the $114 billion bailout Ottawa gave Bay Street in the form of loans and mortgage-backed security buy-outs—as defaults increased.
In the past year, Ottawa again dug deep to help Canada’s housing market bubble survive the crisis. In March 2020, the CMHC reported people were “jamming up” its phone lines asking for rent, mortgage and utility relief.
The crown corporation introduced a six month mortgage deferral for over 25 million households and some very limited rent relief for ordinary people.
Meanwhile, the CMHC announced plans to buy up to $150 billion worth of mortgage-backed securities from Canada’s banks to allow them to more-freely lend. $150 billion, according to BNN, accounts for about 80% of the value of all CMHC-insured mortgages on the banks’ balance sheets. The last purchase was in late October. The CMHC CEO said the measures were intended to offer “relief to those who need it most.”
This is just a small portion of the $700 billion worth of bailouts prepared for corporate Canada by the federal government.
Meanwhile, over $1 billion worth of mortgages were deferred by the end of 2020. Most of them were owned by unemployed workers in construction, retail, and services. By Feb. 2021, 65 per cent of those deferrals had ended. However, the CMHC itself warned that more ordinary Canadians could find themselves unable to pay their mortgages again and fall into arrears.
‘Social programs’ rescue subprime lenders
In 2008, subprime mortgages in Canada were not as integral to the housing market as in the United States. As one economist put it, “The simplest story is that Canada was ‘lucky’ to be a late adopter of U.S. innovations rather than an innovator in mortgage finance.” But things soon changed. As we noted, in 2017, a riskier “shadow” mortgage sector soon emerged and estimates say somewhere from 3 million to 9.9 million Canadians hold subprime mortgages.
According to Bloomberg, Canada’s two largest subprime lenders—goeasy (assets $1 billion) and Fairstone (assets $3 billion)—reported lower than expected delinquencies by June. That, Bloomberg reports, is likely because emergency COVID-19 supports for struggling workers helped ensure they met their payment deadlines.
Loans Canada founder Scott Satov told BNN, “People are in better financial shape with the government assistance,” while goeasy CEO Jason Mullins held out hope the “social programs” will continue to prop up his lending.
On May 20, CIBC economist Benjamin Tal told the National Post, “Trudeau must now begin the ‘extremely complicated’ work of tweaking and tapering his costly assistance programs in order to avoid a wave of defaults after those supports are removed.”
“That’s where we’ll see income suddenly falling, and delinquency rates rising,” Tal said.
Eventually, however, the Trudeau government will cut those programs. In 2021 mandate letters, Trudeau explicitly insists the pandemic will be resolved without any new “permanent spending.”
Another factor that has so far kept Canada’s housing market afloat is a fall in living costs for professionals able to work from home — while many struggle to make ends meet.
The Globe and Mail reported on March 12 that, according to February 2021 data, 600,000 fewer people are working and 460,000 are working fewer hours. Another half million have been unemployed for more than 6 months. While most recent job gains have been part time in retail and hospitality, the number of people earning $17.50 an hour or less has fallen by 791,000.
Yet, on March 8, the Globe also reported that over the first nine months of 2020 the average household saw its net worth increase by roughly $30,600 or 5.4 per cent.
This discrepancy, the Globe notes, follows from a highly-unequal recovery. About two thirds of the networth gains the Globe reported came from rising home values and savings for those able to work from home. “The spoils are not shared evenly,” the Globe noted.
Alberta’s ATB Bank, meanwhile, is warning of a “K-shaped recovery.” That’s one where higher income earners return to normal, while lower-wage workers—the many of the “essential workers” who faced the greatest risk during the pandemic—remain poorer. ATB notes there’s also less hope those industries hit hard by the pandemic will snap back and allow for a rapid repayment. The report reads:
“The upper branch of the K will be higher-wage workers who didn’t lose their jobs during the pandemic. Pent-up demand among this group will provide a boost to consumer spending. The lower branch will be formed by workers who either return to low-wage employment or remain out of work because their former employers have permanently closed or require fewer staff. While the post-pandemic period may feel like the Roaring 20s to some, it will be challenging for many others.”
And, even those higher-wage professionals may not be able to delay a housing crisis for long. Many of the gains from rising asset values are themselves partially dependent on ever-rising house prices enabled, the Globe notes, by a flood of cheap credit. Additional savings, further, could also be eaten at by rising inflation through this year.
Globally, the IMF warned, rising COVID-19 bankruptcies and business closures have concentrated market power in the hands of fewer large firms. This is being accelerated by rising mergers and acquisitions across sectors and less spending on research and development, threatening a global recovery.
We can make better use of these homes and this money
The increasing life seen in Canada’s housing market does not reflect that sector’s underlying health; it reflects the sickness and decay of everything else.
Canada’s capitalists have opted to park part of their money in housing speculation, in the face of enormous need. That’s without even ensuring regular increases in housing construction and without significantly lowering rent in cities like Toronto. Pre-pandemic, this speculation increased the mismatch between rising housing units unoccupied by people and rising numbers of people, without housing. Since the pandemic began, while housing speculation has increased, tent cities in Canada’s largest cities have only grown.
The workers who’ve suffered through the worst of the current pandemic, meanwhile, have been subsidizing this. They’ve subsidized it both as taxpayers and by paying higher rent and higher mortgages, including with their emergency COVID-19 supports.
If there’s enough money to fund housing speculation there is also enough money to pay for basic health equipment during the current pandemic. And there is enough to guarantee all construction workers currently in the residential sector future jobs—either building housing for need or repairing the schools, roads, hospitals, water systems and other infrastructure across Canada that today lies in disrepair.
The banks, the speculators, the residential construction industry—and capitalism more generally—have proven themselves unable to provide adequate housing for all. This industry needs to be taken away from them.