Canada’s Housing Bubble Is Getting Way Worse, And Young People Are Screwed

Experts warn that overall wealth inequality is only going to worsen without real interventions to cool housing prices.
March 18, 2021, 6:30pm
A "Sold sign" in front of homes in the Midtown neighborhood of Toronto, Ontario, Canada, on Thursday, March 11, 2021.
A "Sold sign" in front of homes in the Midtown neighborhood of Toronto, Ontario, Canada, on Thursday, March 11, 2021. Photographer: Cole Burston/Bloomberg via Getty Images

Paddy Treacy gets a sinking feeling every time he checks Toronto real estate listings alongside mortgage calculators, something he’s done in earnest since 2019 when he and his girlfriend decided they wanted to move out of their rental apartment. Prices keep shooting up and there’s no end in sight. 

“You hope that maybe things will start cooling down, and that’s what people have been saying for years would happen eventually. But it hasn’t happened at all,” said Treacy, who’s about to turn 30 and owns a draught beer maintenance company. He and his girlfriend make around $150,000 combined a year, and thought they would be able to afford to own a home in the city where they’ve lived for a decade. But the cost of the down payment he could afford, combined with mortgage insurance, is too prohibitive.

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“And I’m somebody who’s been working ever since I was 16 years old, with maybe like a week or two in between jobs at any given time. I don’t lead an extravagant lifestyle at all,” Treacy said. “But Toronto has become less of a city for me and more of a city for other people, I guess.” 

At the start of the pandemic, housing prices were predicted to plummet. But within a year, prices soared across the country, putting Toronto and Vancouver in the world’s top five least affordable cities, according to Bloomberg. Last month, the average price of homes sold in Toronto broke $1 million for the first time, following a 15 percent increase from last year. Most other major Canadian cities such as Montreal and Ottawa have also reported double-digit increases since 2020. 

Things are also heating up beyond Canada’s major cities in places not known for high home prices such Atlantic Canada, which saw a “record-shattering” 2020. In Nova Scotia, for example, sales in January and February were up more than 30 percent compared to last year, with the average price of homes sold in February also jumping by more than 30 percent.

Home ownership is becoming more out of reach for many Canadians, especially younger Canadians who fear they might never be able own a home on their own. And experts are warning that overall wealth inequality is only going to worsen without adequate interventions.

Unaffordable by design

In recent months, Canadian mortgage rates have hit historic lows. At the same time, demand for bigger homes has greatly outpaced supply, leading to exorbitant prices and bidding wars. The surge in demand has left Canada with around 1.9 months worth of housing inventory available, a record-setting low.

The market prices attract “speculative activity, which adds more fuel to already hot markets,” Robert Hogue, an economist at Royal Bank of Canada, said last week in a report to investors.

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But all of this has been a manifestation of underlying factors that have been fuelling housing unaffordability for years, and the way the Canadian economy is deeply tied to housing. Housing now comprises nearly 10 percent of Canada’s GDP, twice that of the U.S. 

“If a pandemic-induced recession is not sufficient to cool down housing prices and give earnings a chance to catch up, (then) we all must confess that our housing system, perhaps unintentionally, is designed so that is grows housing prices faster than local earnings, that it exacerbates unaffordability challenges,” said Paul Kershaw, a policy professor at the University of British Columbia and founder of advocacy group Generation Squeeze, which focuses on housing and young Canadians.

Financial tools, such as real estate investment trusts, and other forms of financialization in the housing market are also to blame for rising prices.  

“They want to see increases in value because it benefits the shareholders,” said Nancy Worth, an economic geographer at the University of Waterloo who studies intergenerationality and precarity.

And younger people hoping to own a home are bearing the brunt of that impact, a year into the pandemic.

Kershaw’s research shows that in 2019, it would have taken the typical young Canadian 12.7 years of full-time work to save a 20 percent down payment on an average-priced home in this country. By 2020, that rose to 14.3 years. In the Greater Toronto Area specifically, it rose from 21 to 24 years of full-time work. In 1976, it would have taken five years for someone around a similar age and income level.

“We’ve tolerated home prices rising so fast that we’ve tacked on years of additional work that younger people have to put in to try to think about making home ownership possible,” Kershaw said. “This is a real detriment to a younger demographic because it signals that we are keen for our economy to evolve in ways where hard work pays off less than it used to.”

Deepening gulf of inequality

For Ricardo Tranjan, senior researcher at the Canadian Centre for Policy Alternatives, what’s happening with housing in Canada is emblematic of how some sectors of the economy, particularly the entertainment and hospitality industries, have been hit harder than others over the past year. 

“Statistics show that higher income earners, by and large, were not economically affected during the pandemic as predicted,” Tranjan said. “At the same time, they have increased disposable income because there’s a number of things that they like to do that they weren’t able to do. There was an expectation that the economic impact was going to be more widely shared. And it wasn’t.”

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When it comes to rent prices, Tranjan pointed to data showing that a high proportion of Canada, especially young people, are paying more than 40 percent of their disposable income on rent. “What’s left? Not a lot. Are they able to save up? No,” he said.

“We have a growing share of the population that is very financially insecure, whereas a small share of the population, it’s sitting on homes that have values going up by 10, 20 percent.”

Tranjan said that he came to Canada in the 1980s from Brazil, where people lived “in two completely different and socially divided worlds, side by side.”

“My fear is that’s what we’re going towards here,” he said. “If you compare Canada with social economic inequality to the U.S., today we’re doing much better. But for how long?” 

Cooling the market

While Worth shares Tranjan’s concerns about what the housing market says about growing wealth inequality, she doesn’t see anyone, or governments, “putting the brakes” on the situation. 

In February, Bank of Canada Governor Tiff Macklem said that the middle of a pandemic and economic turmoil was not the time to tighten the rules around the housing sector, though he acknowledged the early signs of “excess exuberance.”

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“We need to watch things very closely but I’m not recommending new measures right now,” he told reporters

However, Worth said the system and market will be forced to change at some point. “I do see it changing just because there’s a whole segment of people that don’t have access to this kind of wealth generation. So it’s going to change whether it wants to or not,” she said. 

“The question is how do we respond as a society? Do we let our society become more and more unequal with housing as the wedge that drives us apart? Or do we think about policy tools that try to equalize the playing field in some way, but also begin to see housing as shelter that everyone should have access to?”

Kershaw pointed to New Zealand as another country with an extremely hot housing market, but one that’s putting forward a national plan to deal with it. As a way to curb its growing speculative housing bubble, the Reserve Bank of New Zealand (the Bank of Canada counterpart) announced it would raise the minimum requirements for mortgage down payments, placing stricter borrowing requirements on investors. 

“There also has to be the monetary policy conversation and there’s got to be a conversation about the way in which our zoning in our urban centres continues to restrict the density needed to build the supply that will help ease the price pressures,” Kershaw added.

“Ottawa and all the provincial governments need to say that our strategy to build back better (after the pandemic) includes growing the economy outside of housing,” he said. “Until we say that, the Canadian economy is largely oriented towards people borrowing and lending and investing into real estate. And that is not helping our broader productivity and our job creation.”

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