Dependence on real estate might cripple Canada in the long run - analysis

The increased importance of real estate in the Canadian financial system has made the latter especially vulnerable to factors that threaten to upend the housing markets, with no other buffer or fallback in the worst-case scenario.
 
In an August 18 analysis for The Globe and Mail, columnist Konrad Yakabuski noted that the record-breaking heights reached by the real estate segment on a nearly monthly basis have essentially made Canada solely dependent on the sector.
 
“Canada is now a real estate nation, with little else to keep the economy from sinking into an even deeper funk. Gross domestic product shrank 0.1 per cent in May, and that’s after excluding the negative impact of Alberta’s wildfires on oil sands output. Yet, we’re still buying houses like there’s no tomorrow,” Yakabuski wrote.
 
Yakabuski pointed out that real estate’s share of the Canadian GDP has risen by 0.4 percentage points just in the past two years, and by 35 per cent since a decade ago. Meanwhile, all other industries (including the once-central oil and manufacturing segments) have contracted.
 
“When you tack on to all those real estate fees the financial services that are bought and sold as part of real estate transactions, and the home renovations undertaken by prospective sellers or those unable to trade up to bigger or better houses as a result of surging prices, and it’s not going out on a limb to suggest that the sector has grown too big for the country’s own good,” Yakabuski argued.
 
And in a departure from the growing chorus of thought pieces pointing at wealthy foreign nationals as the cause of the inflamed prices in Canadian housing, the columnist put the blame solely on ill-advised demand-side measures crafted by policy makers.
 
“Not only have low interest rates and restrictive land-use policies created an affordability crisis by driving prices for detached homes through the roof, any sudden reversal of those policies would take the floor out of the market,” Yakabuski explained.
 
“Restrictive land-use and densification policies in B.C.’s Lower Mainland and Ontario’s Greater Golden Horseshoe, on top of development fees and bureaucracy, have made it extremely difficult and costly to build single-family detached homes,” he added. “If prices do start to fall, even moderately, buyer psychology will shift rapidly and a reverse wealth effect will set in. A real estate crash (which bypassed Canada during the last recession) could become a self-fulling prophecy.”

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COMMENTS

  • by Kris Kooblall 2016-08-24 2:03:14 PM

    The issue is not that foreign nationals, in and of itself, solely contribute to the housing crisis in Vancouver and Toronto.

    /And in a departure from the growing chorus of thought pieces pointing at wealthy foreign nationals as the cause of the inflamed prices in Canadian housing, the columnist put the blame solely on ill-advised demand-side measures crafted by policy makers./

    Housing is an economic good that is purchased by Canadian families to live and raise their families. Where else are they expected to live, if not in proximity to their work and their lives?

    Canadian families pay taxes in the form of the HST that drives revenue for our government to provide essential services.

    Wherein lies the incentives and benefits to Canadians for foreigners to have unqualified access to prime residential properties?

    That foreigners invest here by purchasing prime real estate and crowding out Canadians purchasing Canadian real estate for their families to live in.

    We are shooting ourselves in the foot and very soon we may not have the use of our feet.

  • by MFenn 2016-08-24 2:27:10 PM

    While some realtors and single issue campaigning groups keep repeating emotive mantras against foreigners and egging on politicians to put up taxes; yet, as the article acknowledges, it may be that more broadly too much government intervention already poses difficulties for the real estate market in the form of "restrictive land-use and densification policies in B.C.’s Lower Mainland and Ontario’s Greater Golden Horseshoe, on top of development fees and bureaucracy": well stated.

    Less government, not more.

  • by Kris Kooblall 2016-08-24 2:38:17 PM

    MFenn,
    Please tell that to the Australian, Chinese, Singaporean, New Zealand governments et al.
    What is the primary function of real estate and why are those governments protecting their real estate markets?
    Is it less government and more the anomalies of the market?
    And you may be right; however, where is the supporting argument?
    The anomalies in our national real estate markets with regard to discrepancies in value makes our economy vulnerable as illustrated in the June/ 2016 Bank of Canada Report.

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