Canadian home prices in after-inflation terms have more than doubled since 1980.Michael Valdez/Getty Images/iStockphoto
Stephen Harper and his Conservatives expend a large amount of political energy on measures intended to save consumers a few bucks on mobile phone charges or unbundled cable TV channels. Oddly enough, though, they seem largely content to stand by and watch as Canadians grapple with ever rising home prices.
It's not difficult to explain this apparent discrepancy if you look at the politics of the situation. Few Canadians own giant telecom businesses; many own homes. Therefore measures to rein in wireless and cable companies are vote-getters, while any moves by Ottawa to tamp down home prices are ballot-box poison.
But shouldn't we expect a bit more from the stewards of our national economy than just politics as usual? Canada's red-hot housing market has passed the point where anyone should see it as an economic positive.
You wouldn't know this, of course, if you merely read this week's assessment of the national housing market from Canada Mortgage and Housing Corp. It assures us that while real estate prices may demonstrate a "modest" degree of overvaluation, home values are not in bubble territory and that the risk of a downturn is small.
Really? The International Monetary Fund's Global Housing Watch reckons that Canada is among the most expensive markets in the world based on fundamentals such as home prices in comparison to rents and income. There's also the disturbing fact that home prices in after-inflation terms have more than doubled since 1980.
One problem with the trend to pricier homes is generational inequity: Young people must now pay far more, in real terms, for a house than their parents did. As a result, millennials have much reduced capacity to save for other things, such as retirement. Considering that most people in their 20s and 30s don't enjoy the same pension benefits as their parents, this hardly seems fair.
Even more worrisome is the long-term economic hangover that could result from today's high home prices. Tim Harford, a British economist, notes that buying a house during the high-inflation years of the 1970s and 1980s used to begin with five years of scrambling to make dauntingly large mortgage payments. Once you reached that point, however, inflation would have whittled down the real cost of your mortgage by a dramatic amount, leaving most home owners with the financial leeway to pursue other goals.
Today the situation is reversed. Low interest rates make mortgages seem very affordable at first. But since inflation is also low, the real cost of your mortgage declines only slowly. The upshot is that current home buyers are likely to find themselves still scrimping a decade or more from now. This is not good news for an economy that depends heavily on consumer spending.
A housing boom can also hurt in other ways. Three U.S. economists – Indraneel Chakraborty, Itay Goldstein and Andrew MacKinlay – published a paper this fall that finds banks tend to cut back on commercial lending in strong housing markets as they focus on mortgage lending. Rather than being a spur to the economy, policies that support the housing market can actually wind up restraining growth.
Many Canadians like to attribute rising home prices to population growth or to buyers' sudden discovery of the particular beauty of their neighbourhood. By and large, though, those lines of logic simply don't hold up. Canada's population has expanded at roughly the same pace for decades. Rather than occurring only in especially attractive areas, the increases in home prices have been felt in many cities, in multiple regions.
Canada's housing boom seems, in fact, to fit perfectly in line with the pattern outlined in a new study by Katharina Knoll, Moritz Schularick and Thomas Steger. The three German economists tracked house prices in 14 advanced economies since 1870 and discovered what they call a hockey-stick pattern.
Home prices were largely flat until 1950 or so, then began to climb at a slightly faster pace. Some time in the mid-1990s, prices hit the accelerator and rocketed to unprecedented levels. Home prices across much of the developed world surged far faster than incomes.
There are many possible explanations. Rising transportation costs and increased zoning regulations may have reduced the supply of attractive land; easier borrowing conditions probably fuelled demand for mortgages.
But it's hard to miss the fact that rising home prices have also been accompanied by sluggish economic growth and financial crisis. It's time for Ottawa, as well as other national governments, to ask why rising home prices don't deserve the same concerted attention as expensive wireless charges or exorbitant cable-TV fees.
Ian McGugan