Federal government policies intended to avert a credit crunch and economic calamity have inadvertently destabilized Canada’s housing market and widened the chasm between the haves and have-nots, charges a Vancouver realtor and housing market analyst.
“CMHC [Canada Mortgage and Housing Corporation] brought in an insured mortgage program, the Bank of Canada bought up Canada Mortgage Bonds—all these programs were introduced to stave off a credit crunch and, in the process, they created a credit boom where now you have residential mortgage growth running at a 10-year high,” said Oakwyn Realty’s Steve Saretsky. “It’s definitely manufactured in Ottawa and it mitigated some of the pain of what would have been a longer recovery, but at the same time there are repercussions, which are home prices rapidly rising across all of Canada. It’s great for people who already own real estate and detrimental for people who aren’t already in the market because they’re falling further and further behind.”
A credit boom built upon feeble fundamentals will make reining in mortgage lending difficult lest the house of cards collapses, he added.
“It’s like a drug addict: the more drugs you keep giving them, the harder it becomes to get them off those drugs. The larger you make the housing market, the more you have to double down on housing, which the government keeps doing, and it creates a feedback loop.”
The feedback loop Saretsky’s referring to is Canada’s 20-year bull market, which neither the Great Recession nor the COVID-19 pandemic have slowed for long. Canadians resultantly believe it’s well-nigh impossible to lose money on real estate, a position that outgoing CMHC president and CEO Evan Siddal’s recent mea culpa likely did nothing to disabuse.
“People are being reinforced that it’s a risk they can’t lose money on, so they’re taking riskier bets,” said Saretsky.
The Bank of Canada’s decision to plunge interest rates initially proved a boon for first-time homebuyers after years of being priced out of starter homes in the country’s largest cities. However, approaching the one-year anniversary of the pandemic, the spread between single-family detached houses and condominiums in the City of Toronto has grown to $1,007,236, meaning that house-rich buyers are priced out of the detached market and have redirected their attention to high-rises, typically the domain of first-time buyers.
“Everyone says low rates help people through lower payments. It’s beneficial for entrants when the mortgage rate is 1.5%, but prices rise incrementally to offset low rates. Prices are up 15-20% now, so are low rates still helping or have they cancelled out? A lot of first-time buyers are getting help from their parents.”
In February, the average price of a detached house in the 905 region increased by a whopping 27.8% to $1,300,853, according to the Toronto Regional Real Estate Board, while the average semi-detached home rose by 25.6% to $932,551. John Pasalis, president of Realosophy Realty in Toronto, says such lofty gains are indicative of a bubble.
“Prices are rising well over 30% per year and even more in some areas, and when you have that rapid rate of house price growth, it’s not normal,” he said. “On the ground, when you talk about a bubble, it’s the exuberance from buyers paying over $60,000 more than what the prices were a month ago, and that’s why prices are rising as rapidly as they are.”
Pasalis claims the government is stoking the flames by encouraging Canadians to throw caution to the wind and dive headlong into the housing market because the good times will keep rolling, but he isn’t so sure they will.
“Irresponsible is what they’re telling people, which is that the housing market will keep booming, and for a long time, that they have tons of tools to keep it going and they’re not worried about acceleration right now. (Bank of Canada Governor Tiff) Macklem said it’s not as bad as 2016, which is completely wrong. The fact they’re fuelling optimism rather than concern, to me, is the policy mistake."
That the pandemic has immiserated many Canadians—the unemployment rate was 9.40% in early February—isn’t surprising, but that it’s enriched as many as it has is unexpected. The Bank of Canada just announced that it’s going to maintain its quantitative easing (QE) program at the current pace of at least $4 billion a week, which, depending on who you are, is good news.
“I think it creates a situation of widening wealth inequality,” said Saretsky. “One of the intended consequences of QE is to raise the price of assets. If you have assets and capital, QE is fantastic to enrich people. But if you’re young without assets, you don’t necessarily get to enjoy the benefits of QE. It creates more wealth inequality in the long run, and I think that’s pretty evident in society. People know something is not quite right and that there’s something a little bit broken.”