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John Rapley is a political economist at the University of Cambridge and a senior fellow of the Johannesburg Institute for Advanced Study.

Plenty of homes, too few homeowners. That’s the paradox of Canada’s housing crisis – there may not be an actual housing shortage.

Any first-time homebuyers who ever got trapped in a bidding war, or tenants wrestling with escalating rents because they can’t put together the money for a down payment on their own home, will find that idea outrageous. But it may actually be there’s enough accommodation to go around.

Forecasts of worsening housing shortages start with the inflated price of Canadian houses, which we take to reveal an excess of demand over supply. To this we then add the immigration figures, which surpass housing starts, to conclude the imbalance will only worsen if we don’t ramp up housebuilding.

But do we actually know there’s a shortage? The telltale signs aren’t as obvious as you’d think. Outside of certain markets, the housing-stock-to-population ratio has actually remained fairly stable. Nationally, the number of housing starts has been in line with the pace of new household formation. Meanwhile the early warning signs of a genuine housing crisis, such as overcrowded accommodations and increased homelessness, haven’t changed all that much in recent years. And as for new immigrants, unlike the typical Canadian family, many of them will continue to live together, often in multigenerational households – which is the norm in much of the world – such that household formation could even run below housing starts.

Those years of bidding wars, on the other hand: they’ve been all too real. But it’s also possible we’ve misinterpreted them. We’ve generally surmised that they resulted from a growing pool of homebuyers chasing a limited stock. However, it may just be something else is going on – namely, an increase in activity by property investors. In some parts of Canada, up to two-fifths of the housing stock is now owned by multiple-property investors, one in six owners owns more than one property, and the figure seems to be rising. In short, there are a lot more houses than there are homeowners.

In itself, that says little. Any healthy housing market requires multiple-property owners, since a dynamic economy needs a stock of rental accommodation. But a market can get distorted if the scale of multiple-property ownership grows unusually high, pricing first-time buyers out of the market, and then forcing them to pay inflated rents. And all you need for a market in equilibrium to get thrown out of whack is a few new entrants.

If that’s what happened, it would hardly be surprising. Over the past few years, anyone with money to invest would have been drawn to property, because the Bank of Canada’s monetary policy made it a money-mill. Despite the apparent anomaly that property prices were surging in an economy that was all but stagnant, the bank persisted in its loose monetary policy on the grounds it wasn’t affecting consumer prices.

Now I know it’s all too easy to blame the Bank of Canada, but still, it blew this call. Meanwhile its defence, that nobody saw an inflationary surge coming, rings rather hollow. Long before the Ukraine invasion the bank says triggered the price spiral, critics warned that trouble was brewing (I humbly place myself in those ranks, having published a piece in these pages four years ago).

During the housing boom, any tenant or business having to pay jacked-up rents or priced out of the market altogether could have taken umbrage at the bank’s claim that inflation wasn’t a problem. But the bank had a point, sort of. Consumer prices weren’t rising until recently. But the warning signs were there. Canada’s economic growth had surpassed its labour-productivity growth, which meant that sooner or later, things would get out of kilter.

Economic growth had been driven up by the “wealth effect” of rising asset prices, particularly house prices. Investors who saw their wealth growing in leaps and bounds felt free to spend some of it, taking advantage of ultracheap credit to both buy more property and spend some of the gains. But with so much money going into housing, investment elsewhere in the economy fell, limiting productivity growth, and Canada now has one of the worst levels in the Group of Seven (which, it must be added, is not a fiercely competitive group).

To meet new demand, businesses therefore needed new workers. For as long as they could be found, wages stayed in line, and thus so did prices. But, given that Canada’s population growth and net migration rates had been falling for years, the model was stretched. If anything came along to interrupt the supply of new workers, the house of cards would collapse.

Enter the pandemic. When consumer prices surged, the Bank of Canada, like most central banks, insisted the inflation would be transitory. Like most central banks, it got that call wrong, too. That’s because it focused on the supply of goods and services and concluded, rightly, that once the lockdowns lifted, supply chains would ramp back up and the lockdown-induced shortages would quickly reverse.

But this diagnosis overlooked what had happened in labour markets. A recent study I did with some colleagues concluded that the global labour supply is peaking, and that shortages will become a permanent feature of life. Add the fact that the pandemic experience of collapsed global supply chains has led both governments and corporations to bring some work closer to home, and there’s more work here for fewer workers. That makes workers hot items, and they know it. Equipped with new bargaining power, they’re getting better deals, and that’s showing up in a rise in labour costs. Inflation, central banks realized too late, wasn’t going to be transitory after all.

The Bank of Canada is now atoning for its past sins and has slammed the monetary brakes on hard. So far, this hasn’t caused a recession, which is the conventional way of crushing inflation. But it’s already knocked house prices down, and that alone has started taking steam out of the inflation rate. That’s to be expected: A recent study of the American economy found that the recent inflation surge was caused not by excessive fiscal stimulus, as economists like Larry Summers have been saying, but by the excessive monetary stimulus that inflated asset-values, putting the wealth effect on steroids. The same is likely true for Canada.

Although few expect an outright crash in house prices, it can’t be ruled out. That’s because while headline inflation will come down on the back of falling house prices, all those changes in labour markets and the resultant new bargaining power of workers will probably keep the core rate “sticky.” Inflation will probably return to manageable levels, but not the levels we once knew – and that would mean interest rates stay permanently higher.

Warren Buffett famously said you only know who’s skinny-dipping when the tide goes out. We’ll soon know if investors distorted the property market. By early last year, when interest rates were still in the basement, variable-rate mortgages accounted for a third of new issuance. If those were mostly employed homeowners, whose earnings are following inflation upward, they’ll probably be able to take the hit to rising rates by pulling in their horns. But if they were disproportionately investors looking to flip the properties or cashing in on its rising equity, they may be forced to liquidate some of their portfolio. The added supply could then drive house prices sharply downward.

We’re thus probably now at the moment of truth. Given the final surge of the housing bubble last year, a lot of those mortgages are coming up for renegotiation. If a disproportionate number of them were indeed investors looking to cash in, the rush to liquidate could come soon. But funnily enough, falling house prices will probably give the economy a breath of fresh air. In addition to the decline in inflation and the fact that homes will become affordable again, the economy will allocate capital more productively. Instead of chasing bubbles, investors will have to look for new opportunities. And with labour costs likely to keep rising, that will provide strong incentives to invest in the new technologies and processes that raise worker output.

That would be a big plus for the Canadian economy, which has long been a laggard in these respects. So while we may feel like we’re now sheltering from a storm, come the spring, we could be planting a new garden.