Why, Canada! It's great to see you, old friend. Here, take the comfortable seat by the window. You're probably wondering why I'm here in your living room, so let me blurt it out. This is an intervention. And, yes, it's about this housing habit of yours.
I know what you're going to say: What's so bad about a little mortgage debt? What's wrong with just one more bidding war? Sure, sure. You've been playing this real estate game for a long time and it hasn't killed you yet.
But that's what every addict says. And you, my friend, are an addict: A middle-class junkie, to be sure, but still a fiend on fire for the buzz of cheap mortgages and the rush of rising home prices.
Canada, just look at yourself. Your home prices have surged to unprecedented heights and your debt levels have ballooned. The International Monetary Fund and others have warned of the dangerous rise in borrowing.
And here's your dirty little secret: You're enjoying the whole sick, crazy ride, aren't you?
This is the scandal no one talks about. Officially, everyone is fretting that we may have a housing bubble. Politicians, bankers and regulators go all preacher-faced and proclaim their deep, deep concern.
But let's be honest: No one really gives a damn, do they? And why should they? Now that a record 70% of Canadian families are homeowners, the vast majority of households crave even more insane prices. A politician who credibly promised to jolt the housing market back to reality and reduce prices by 20% would be slashed to shreds by mobs of hedge-clipper-wielding homeowners.
Our elected officials aren't fools. While they devise half-hearted, largely cosmetic measures that might cool the madness by half a degree, the system goes on adding fuel to the frenzy.How, you ask? Tax laws shelter profits on the sales of principal residences. CMHC insures mortgages with meagre down payments. RRSP rules allow first-time homebuyers to tap their retirement savings, while governments proffer various other incentives to nudge newbies into the market.
Any nation serious about getting off its real estate high would demand an immediate end to this nonsense. It could start by introducing—perhaps in increments—a tax on the profits from a principal residence. It could demand far higher down payments, restrict people's ability to pour savings into housing, and discourage first-timers from entering an already crazy market. In addition, it could encourage the building of high-quality rental accommodations.
But, Canada, you either don't do these things or do them only in the most grudging, timid fashion. Fundamentally, that's because you don't want to take action. Let's face the truth. You're just a doper jonesing for your next hit of magically mushrooming real estate prices.
Instead of confronting the ad-diction, you try to pin the blame on foreigners. Really? It's not foreigners who are propelling the lunacy in rust-belt towns like Windsor, Ontario, where prices soared 20% over the past year. It's not foreigners who nearly doubled the debt load of Canadian households over the past generation, from 87% of our disposable income in 1990 to 167% now.
Oh, I know what you say, Canada. You always claim it's just low interest rates, that's all. You insist that with debt so cheap, it makes sense to borrow, especially for mortgages.
So let me be blunt: That's junk math. This is not the 1980s any more. Rates are low today precisely because inflation has faded and economic growth is so lacklustre. In a low-growth environment like this, the real burden of debt tends to stick around because you can't count on galloping inflation or bountiful pay increases to help ease the load. Paying down a mortgage is a long, painful process if you're paying 3% but your salary is only inching ahead by 1% a year.
Piling on mortgage debt in today's climate only makes sense if you believe someone will be willing to buy your property for an even greater price in the future. But how sure a bet is that? Despite what your real estate agent says, there's scant evidence of any housing shortage. Canada's population is growing a mere 1% a year, way below the levels of a few decades ago. Our working-age population is barely expanding at all. Rents have gone up nowhere near as much as home prices, a sign there is actually a fair amount of accommodation out there, even in supposedly packed cities.
Fundamentally, Canada's real estate mania is a financial phenomenon. It's a collective lunacy fuelled by households taking on more and more debt to bet on what they hope will be a profitable investment.
We've seen this story before—in Japan in the early 1990s, in the United States, Ireland and Spain several years later—and it doesn't end well. In each case, big run-ups in real estate prices and mortgage debt gave way to devastating recessions, followed by painfully slow recoveries.
Even if you think Canada can escape that fate, there's still the issue of fairness. Soaring real estate prices are really a transfer of wealth between generations. In many cities, boomers who paid three times their annual incomes for homes a generation ago are now selling them to millennials who are paying six times their incomes. The weight of that debt is going to suffocate young families for decades to come and drag on economic growth.
There's no easy way out, my friend. But there are things we could do. As with any detox program, we have to start by admitting that we have a problem. Then we have to admit we have all the tools to solve the problem if only we choose to do so. Yes, I know, it's going to hurt a little, but here's one final truth: It will only get worse if we wait.