The bizarre way the Trudeau government has dealt with an epic housing affordability crisis in Canada has been to exacerbate the demand-supply imbalance by pursuing the most aggressive pro-immigration policy on record. As a result, population growth keeps climbing, with Canada seeing its highest ever annual growth rate at 2.7 per cent – or more than a million people – last year .
This is truly insane.
The problem is that the country does not have the adequate supply, especially when it comes to residential real estate, to absorb this sort of immigration-led population growth without exerting further strains on the stretched housing market. The ratio of population to housing stock is 40 per cent above historical norms. And the same is true for the homeowner affordability ratio.
It would have been one thing if the Bank of Canada’s rate hikes of the past year had worked to bring real estate prices down to more reasonable levels, but the federal government didn’t let that happen with its aggressive immigration stance, which kept housing inflation intact. Canadian homeowner-wannabees have been crowded out by still-elevated prices and the central bank-induced rates shock.
The need to ramp up debt massively to afford a home has left Canadian household balance sheets extremely stretched, with a debt/income ratio at record levels of 180 per cent. And more than 14 per cent of incomes are now being drained by ever-higher debt-service costs. Even the tightest labour markets on record and expanding earnings growth have fallen short of mitigating the influence from higher rates and still-ridiculous home prices which, by the way, are back on an uptrend.
How much debt is each generation of Canadians carrying, and how do you compare?
The BoC seems unlikely to raise rates again, which means the Canada Mortgage and Housing Corp. has to start clamping down on lending guidelines.
Ottawa should seriously consider a less-ambitious immigration policy, which is doing more harm than good at this point. A country where folks in their 30s are crowded out of the housing market because of an elongated period of excessive home price inflation that is the result of government policy is not a very happy country. This will all come out in the wash in the next election, and if I were in opposition, this is the card I would be playing.
Prime Minster Justin Trudeau has aided and abetted the most onerous housing affordability conditions the country has ever faced and which are having ill effects on society at large.
To show just how egregious the situation is, for homeowner affordability to revert to its long-term average, home prices would need to fall by almost 30 per cent. But the government’s immigration policy won’t allow for this natural correction from crazy-stupid price levels. Interest rates would need to fall nearly two percentage points or we would need to see a 40-per-cent surge in incomes.
No matter, we have a very unstable situation on our hands. It seems highly unlikely that the affordability ratio can remain at such a massive deviation from its long-run average.
The question is: How will it revert to the mean? There is no way incomes will rise by 40 per cent. Maybe over the next decade, but certainly not quickly enough.
What is needed is for the BoC to allow for lower rates, and that in turn requires a fiscal and regulatory policy that will foster a return to more reasonable home prices (sorry, existing homeowners – your net worth needs to go down) and sustainably low inflation (which Ottawa’s spending and immigration policies are working against).
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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David Rosenberg