The guy who runs Generation Squeeze says building more homes isn’t enough to lower prices, because most people buying houses are already property owners. Property owners can either sell their current house to get a load of cash, or borrow against it to get a load of cash. Either way, they can pay a lot for their next property.
As evidence, he mentions that Alberta has less supply per capita than the rest of the country, but house prices are half those of Ontario and BC.
Here are the good bits:
While building more supply is absolutely important, setting ambitious targets does little good if property values continue to rise. Unless they are deeply subsidized by tax dollars, new market units will price in today’s high land values – which have soared well beyond what most can afford with local earnings whether the new homes are intended for renters or owners.
Plus all the focus on “Build! Build! Build” ignores that lack of supply isn’t the only, or even primary, factor influencing the price of rent and ownership. You could be forgiven for thinking otherwise, since undersupply has become the dominant narrative shared by Canada Mortgage and Housing Corp. and a variety of financial institutions.
The Bank of Nova Scotia, for instance, published reports lamenting that Canada has a smaller number of private dwellings per capita than the G7 average, blaming this ranking for much of our unaffordability problem. This leap in logic begs questions, since the same Scotiabank data also show that Alberta has lower levels of housing supply per capita than most other provinces, yet home prices in Alberta are about half as expensive as those in Ontario and B.C.
…
Mr. Pomeroy [who published a study about this stuff] encourages us all to widen our focus to include the vicious cycle by which rising home prices drive rising home prices.
First-time homebuyers are a minority of purchasers. They compete with many Canadian buyers who have already owned in the market. Bolstered by the equity they’ve gained from surging home values, existing homeowners bid up the price of housing to levels that are disconnected from earnings paid by local jobs. This was especially true prior to recent interest-rate hikes, because historically low interest rates made it cheap for homeowners to liquefy wealth windfalls created by skyrocketing home values.
Some homeowners bid up the price of housing simply to relocate. Others do so to purchase an investment property in search of additional wealth windfalls.
The latter are among the one in six Canadian homeowners who own multiple properties. Most are over the age of 55. To pay the mortgages on their investment properties, they increasingly collect rent from younger residents with dashed dreams that a good home should be in reach for what hard work can earn.
This reveals that the vicious cycle by which those enriched by high home values bid housing costs ever higher isn’t just ruining the market for aspiring owners. It is also breaking the rental market, as confirmed by the record-high rents reported this summer.
To disrupt this vicious cycle, political leaders must help break Canada’s cultural addiction to rising home prices by endorsing the plan that governments will use all available policy tools to stall home prices for the foreseeable future.
Allow only first time buyers with no other properties to access the new development.
It still doesnt matter if its valued at $650,000 (average home price in Canada).
Even with “only” needing a 5% downpayment as a first time home buyer, thats still a $32,500 nest egg you need to save up for, which I am not convinced a lot of people can do without serious help from their parents or other benefactors.
A massive shift needs to happen to bring home prices back to reality. A 3 bedroom middle class family home should not casually be a million dollar property, as it is in many, many large cities across canada.
Housing is considered affordable if it’s repayments and maintenance is 30% of your income.
So a median income in your area should see a median house price at around that. I did a bit of maths and it’s around a 4x multiplier given current interest rates in my area.
Also consider that everyone needs a home, so median is not the cheapest available.
In my suburb the multiplier last year was 7.5x, and I just did a check and the cheapest available housing listed is 6.5x
So you are totally right, there needs to be a massive shift
None of the donor class want prices to come down. They won’t be able to price gouge as landlords and the middle class will run out of credit to buy their products.
I feel like it affects a lot of people who want to trade up: sure they can sell their house for a lot more than they bought it, but houses are so stupidly expensive, that they still can’t afford anything nice in their area. Unless they have a great income or are willing to take on debt.
Ban non-primary use home ownership. Or make the taxes so high it’s not worthwhile.
Here are some of Generation Squeeze’s suggestions for improving affordability. Here’s one that’s interesting:
The first step is putting a price on housing inequity by adding a modest surtax on homes valued over $1 million. This surtax will apply only to the top 12% of high-value homes – the vast majority of Canadians won’t pay a penny more. But it will help slow down home prices so earnings have a chance to catch up, demonstrating allegiance to the Canadian dream that a good home should be in reach for what hard work can earn.
Here in the Netherlands we have such a surtax, but it doesn’t really work.
I rarely think the USA has the best system, but when it comes to housing equality, the USA has done one thing right: high property taxes combined with deductions on income tax and lower income taxes overall.
Buying a house in the USA for speculation is rarely worth it, because the property taxes are just too high. You can’t afford to let a property sit empty. It must either be sold or rented.
Meanwhile, in Canada and the Netherlands, renting out an empty home for 30 nights a year on AirBnB is enough to cover all costs. So it’s very easy to have houses sit empty while waiting for the high ticket renter or buyer.
I think the US system could be slightly improved by better regulating rents.
I looked at tax rates for Boston:
That means that the owner of a $500,000 house pays $5,370 this year, not counting the city’s homeowner exemption
That’s very similar to what the tax rate in Ottawa is. According to this random calculator, tax on a 500k home would be $5,846. I’m not sure how representative Ottawa is, however.
With the conversion rate, Boston is about 25% more.
USD $5,730 // $4,352
CAD $7,213 // $5,846
edit: WTF is this? is this a joke? “Owners of units that remain vacant for more than half of the calendar year will be charged an extra fee equivalent to 1% of the property’s assessed value”
A whopping $12 per $1,000 accessed? leaving a $8.8 million dollar property would cost $1,000…
Oh yeah, should have been more precise. In the USA, property taxes are set more locally. Often even below the State level. So it does vary.
I should not have said it’s better in the USA. It’s more accurate to say that, in the USA states and counties have extra tools to tax property and some have used it to good effect.
Perhaps I should have even said had tools, since it seems Trump put a ceiling on the state and local tax deductions.
To illustrate what I meant, this house in Houston was assessed at $250K and paid about $4K in property tax in 2018. That $4K would then be deductible from federal income tax, so for a working person, it would be easier to pay than for an investor. Texas also didn’t/doesn’t have state income tax.
https://www.zillow.com/homedetails/12107-Laneview-Dr-Houston-TX-77070/28357645_zpid/
I don’t know what happened after 2018, I guess they lowered property taxes and the house is now for sale for $450K.
Also found this overview. It seems most of the USA doesn’t follow the model:
That does nothing for the prices at the low end, and it keeps most landlords happily in their current (extremely high) rents. What hope do middle and lower class people have to outbid the rich for the same houses?
Wouldn’t this negatively impact people who bought their homes at a much lower price when it was affordable and whose home has since increased in value to 1mil+
They bought a house, not an investment.
If they did buy it as an investment, well, they certainly should learn that investments aren’t guaranteed, and that anyone promising that should have a watchdog alerted on them.
While I don’t disagree, I dont see how it helps anyone else? Only sounds useful if it’s exclusively on owners of multiple properties
Am I missing something?
Doesn’t make sense to me tho. Someone could non-problematically own one 1mil house, or problematically own ten $500k homes they rent out
While I understand the views of this article, I don’t believe it. It’s true that if we build 100k homes in each province, it’ll do little to dent housing prices. We don’t need 100k new homes, we need like a million in each major city. People keep talking about how big of a deal building a few thousand homes are, but they’re literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
And while I agree that not everybody would be looking to get their own personal house, increasing housing would vastly let up the pressure on rentals as well. And making rentals cheap enough that you could get one while working part time as a student would also mean that the moment you get a full-time job, you’d have the free time to do everything you could want to improve your life. The fertility crisis we’re having wouldn’t be such a big deal either, not to mention all the stress the young are dealing with since they know that moving out of home before 30 is a pipe dream for most of them.
People keep talking about how big of a deal building a few thousand homes are, but they’re literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
I think that’s the gist of the op-ed - we’re unwilling to build enough houses to flood the market and lower prices. So we need to deflate prices in other ways.
No I think the op-ed is trying to say that no matter how many homes we build, it won’t matter because those who already have homes can just leverage those homes to take on loans to buy more homes, preventing those who don’t have them from actually buying homes since they’re always at a deficit compared to those who are effectively already rich.
What I’m saying is that if the supply of homes increase by something like 40% across the board, it won’t matter if many of these people buy a second or third home, as it’s not like every person with a house is going to buy more. And even if they do, they’ll resort to renting them out because a home they’re not actively using is nothing but a cost that has a high chance of costing more than anything they can sell it for in a few decades due to property taxes. If they do rent them out, they’ll be competing with a massively increased rental market, lowering prices or else dealing with property that is costing money rather than making money.
A net win even if everything this person says comes true. And if it doesn’t, we have a massive influx of homes that’ll push down prices. The only issue is that we’ll be dealing with a new and long term recession as the retirement plans of millions go out the window. It’s a risk but taking this risk is the only way to prevent this problem from increasing perpetually, or else the housing prices crashing due to the bubble popping anyways.
Why do people always act like can only be one thing done to resolve the housing issue.
We could build our way out of this like a screw can be driven in with a hammer. It would probably just damage the screw, the wood and do a poor job binding the materials. We could attempt to build our way out of this while seeing how much investors skim off the top.
An extra few hundred thousand houses is going to take years if not decades to get built but we could have new taxes in the span of months and the houses would still be built. However none of these are even the real issue.
It’d be amazing if we could build that number of homes. We should try to build as many as possible. However, it seems unlikely that we’ll get anywhere near even the modest targets the various levels of government have set for themselves.
In the meantime, we should explore other avenues to lower the cost of housing. The housing crisis has many causes, so it makes sense that it’d have many solutions.
So we need to deflate prices in other ways.
You can’t redistribute your way out of a shortage.
In Canada there are 15m private dwellings and 38m people.
That’s one house for every 2.53 people.
I have 5 people in my house (wife, 3 kids)
I think there is plenty to go around and it’s not a shortage thing.
increasing housing would vastly let up the pressure on rentals as well.
The elephant in the room is that the housing market crashed in 2022. Rent is high right now because nobody wants to buy into a crashed market. If you have somewhere to rent, why would you buy right now? The dead cat bounce we’re watching might trick a few people, but on the whole? Houses will almost certainly be a lot cheaper in another year. It took around three years to find the bottom when the US housing market crashed and it is likely we’ll see something similar.
So, by the same token, what incentive is there for someone to build new units right now? Once the housing market finally does find the bottom those renters are going to start thinking about buying again. The rental boost is only temporary and likely to be gone by the time you get around to building something new – something that cannot happen overnight.
I was looking at the numbers, and while I agree to a certain point (if prices are going down, it’s better to rent and hope that prices will continue going down so you can buy at the best price possible) but prices have shot back up since the last year and are almost at the 2021 prices in the span of a single year. We had a temporary dip in prices, not any form of a drop.
And as for incentive, there’s a massive amount. With prices as high as they are, it’s entirely a seller’s market, and if you can make more homes, you basically have as much cash to take as you have homes to sell. The issue is that builders aren’t able to build new homes due to legislation, zoning regulations, and plenty of other hurdles placed. I keep seeing so many properties that have “we are planning to build this skyscraper condo here once we have our permit” and the old building just sits there for 3-5 years before they get their approval.
but prices have shot back up since the last year
They did shoot up, but then started to fall again. A class, textbook perfect, dead cat bounce. The surest sign of all that the market has crashed.
With prices as high as they are, it’s entirely a seller’s market
It’s not. Because people are reluctant to buy into a crashed market, there aren’t many to sell to. High prices does not mean a seller’s market, that just means that sellers want a high price. Housing is notoriously sticky. People can sit on properties for years at a time in hopes of getting a high price. Generally speaking, people buy houses for the long term, so they don’t need to sell them any time soon.
That might change as more and more mortgages start to get renewed. If you can’t afford a property anymore, that becomes a good reason to get a deal done as fast as possible. But a lot of people are still enjoying low interest mortgages, and the rest were stress tested into a mortgage they can still afford even with high rates. Again, there isn’t much pressure to sell for a low price right now. One can just keep the house on the market indefinitely to see what happens. If nobody buys, oh well?
Eventually a reckoning will occur when people start to realize the high price they want isn’t going to happen, and will eventually start to settle for low offers, but that can take years to play out.
The issue is that builders aren’t able to build new homes due to legislation, zoning regulations, and plenty of other hurdles placed.
An even bigger problem was that there weren’t enough builders. Anyone building houses was booked up for years at a time. Even if there were no hurdles, there wasn’t the people to get the job done. Higher wages would have been needed to get more people interested in construction work, but that would mean an even higher cost of housing.
That isn’t the case anymore, though. Many home builders are now looking for work. New home starts have cratered. Nobody wants to get involved in a crashed market – hence why rent has skyrocketed.
