The average household debt-to-income ratio in Vancouver is 240 per cent and rising, a condition Kean Birch writes is built into Canada's asset-based economy that's underpinned by continuous asset price inflation alongside the suppression of income inflation,JONATHAN HAYWARD/The Canadian Press
Kean Birch is an associate professor in the department of geography at York University.
I predict that Canada’s housing market will crash next year, or in 2021 at the latest.
A bold claim, you might think. But if we look at housing booms in the past, each lasted around 10 years and we’re reaching that boom end point in the next year or so. Canada largely survived the 2008-09 housing crash unscathed, which seemed – and still seems – like a good thing until you realize it just means this country has had another 10 years to embed housing assets at the heart of its economy.
And this is a major problem. It means people are more in debt than before, with the Canadian household debt-to-income ratio topping 170 per cent in 2018 – and this ratio is more than 200 per cent in Toronto and more than 240 per cent in Vancouver, according to Canada Mortgage and Housing Corp. A slight upswing in interest rates will put a lot of people under financial water, while new policy initiatives to cool overheated real estate markets are threatening the dream of ever-rising house prices.
Why might this matter?
We have to think about what most people rely on nowadays to support themselves and secure their futures. And the answer is assets – housing assets in particular. It’s no longer our salaries or incomes, nor even our pensions. Rather, Canada has become an asset-based economy in which it’s now a viable choice to buy a house far above your income threshold and sit tight – renting out rooms to pay the mortgage you can’t afford on your own income alone – waiting for its value to appreciate.
But there are perils to relying on this sort of economy for our future. An asset-based economy is underpinned by continuous asset price inflation alongside the suppression of income inflation, meaning a rising debt-to-income ratio is built in.
Much of this current predicament can be traced back to the “neoliberal” attack on Keynesian policies during the 1960s and 70s. While “neoliberal” is a contested term, often used by people to mean anything they don’t like, I use it here in a more restrictive sense to mean those people who think free markets should be the cornerstone on which to organize society.
In this sense, neoliberals such as Friedrich Hayek argued forcefully that Keynesian policies would lead to continuously rising inflation; simply put, he thought trade unions would fight for above-inflation wage rises year after year, creating an automatic inflation ratchet. Now, neoliberals won that policy debate and we have had wage suppression since the late 1970s, plus low inflation.
Today, though, I think it makes sense to talk of a neoliberal ratchet in which asset prices are continually inflated, pushing the cost of things such as housing further out of reach of more people. So, while neoliberals sought to release markets in order to let them work their magic, paradoxically this had the unintended effect of forcing governments, business and everyone else to pro-actively and continuously raise asset values.
And this creates a problem for countries such as Canada that are trying to diversify their economies in the face of urgent technological or climate-change imperatives. It’s almost impossible to transition the economy away from an asset-based logic, since to do so would destroy the wealth of millions and the futures built on the expectation of ever-rising asset values.
As a result, innovation suffers in Canada. More investment goes into housing assets than developing new technologies or knowledge; for example, Canada spent $34.5-billion on research and development in 2018 versus $78-billion on home renovations in 2017. Individuals invest less in themselves as it’s easier to buy a house and rent it out than it is to pay for education or training; the latter being a far riskier bet.
It’s increasingly difficult to see how Canada would be able to change economic course without a wholesale restructuring of our personal ambitions and expectations. And no one is going to propose political or economic solutions to climate change that might threaten the wealth tied up in our real estate assets.
The current asset-based economy requires us all to protect asset values at almost any cost, so expect to see a range of policies this time next year designed to prop up a faltering housing market.
Will it succeed? My prediction is that it won’t this time around. But perhaps it will create an opportunity to do something different.