The beast

My economist pal Derek Holt calls it ‘the insatiable beast’. That’s housing, And he’s right. Real estate is now a big threat – globally, as well as here. But especially here.

Sure, the kids are moaning and weeping all over Reddit daily that fate is punishing them with home ownership a fading dream. But this is bigger than jilted generations. We’ve made it a timebomb at the heart of the entire economy. “The housing beast sucks in resources from all around it, leaving less for other purposes,” says Holt.

That’s easy to see. Just wait until the 16th and behold how the entire federal budget is bult around, and obsessed with, real estate. Already we know it will contain multiple billions for housing inventives as well as a ‘bill of rights’ for renters to match the ‘mortgage charter’ for owners. There is nothing about real estate politicians cannot keep their digits off.

Holt’s big deal is productivity, In fact the Bank of Canada last week issued an unusal warning that our country now has a ‘productivity emergency.’ It’s not the fault of the government, per se, but rather a cultural and financial fetish with residential property.

“This obsession with housing—bigger, nicer, with fewer people in each one, and more of it—helps to understand waning productivity across multiple economies over the years since the late 1990s,” says Holt. “The core issue is this: are many folks across modern societies making themselves house-richer in the shorter-run, but poorer in the longer run if it comes at the expense of productivity growth as the single biggest determinant of rising living standards over time?”

The point is simple: the more capital we stuff into houses, fuelled by record heaps of debt, the less is invested in enterprises which grow the GDP, throw off jobs and hike tax revenues. Every year more of the economy becomes dependent upon housing. In fact, it’s unclear what size that hunk is. StatsCan suggests something more than the entire mining and oil and gas sectors combined. Re/Max just claimed it’s 40% of GDP. That would be a world record.

So what, you ask?

Well, too much reliance on one goose is dangerous. If inflation goes wild and rates spike to double-digit levels, we’re cooked. Second, this debt we’re all pickled in is now structural. It never goes down, only up. Families are looking at renewing over $200 billion in home loans soon, at much higher rates. That will murder household cash flow and whack an economy two-thirds dependent on consumer spending.

Third, along with bad tax policy, it has led to an historic financialization of houses. With societal obsession, low mortgage rates and easy credit from willing lenders (plus the Bank of Mom) residential real estate has gone from home to investment asset. Yesterday we shared RBC’s latest, crazy numbers about affordability. Average families in urban areas cannot afford average houses. The amount of income being sucked off in ownership costs is stunning, and unsustainable.

Of course, Covid made everything worse. Emergency mortgage rates and the ensuing house lust pushed us into new and uncharted territory. It makes you wonder how we can ever go back – unless there’s a crisis. A reset. A real estate depression?

This brings us to how ‘the wealthy’ are coming to control the Canadian market. A paper by academic and U of T researcher Jeremy Withers is an eye-popper. “Ownership of housing is becoming increasingly concentrated in the hands of wealthy Canadians, fostering a worsening status quo for everyone else,” he says. “Home ownership rates have begun a historic decline as housing investors bid up and buy out a fast-growing share of the country’s condo apartments and houses. Crowded out of homeownership, upper income residents are being flooded into a tight rental system where lower income communities face declining affordability and security of tenure.”

So, investors now own 57% of all the recently-built condos in Ontario and 49% in BC. In the past decade investor ownership of condos doubled and of detached homesit increased by a third. In the GTA, for example, it’s estimated one in five households holds multiple properties. And you can see below that in Ontario the number of condos rented out (at historic price points) has romped in recent years.

Number of houses rented out by province

Source: Jeremy Withers

The conclusion is that housing wealth is moving from the hands of individual households into the investment portfolios of wealthier Canadians. (And, again, this trend is global.)

Withers says investors are crowding out individual buyers, which is currently a rallying cry of the houseless young. He concludes Ottawa is on the wrong track in its build-more-faster frenzy, in the absence of controls on investors. He also admits Canadians have done this to themselves, with foreign ownership of our real estate being a minor factor.

Now, it’s worth nothing that Withers (unlike Holt) is a lefty. He says so: “This series seeks to advance a democratic socialist agenda for transforming our current housing system, which is unsustainably financializing and concentrating control over basic human rights.” That admission puts him in sync with the Mills and Zs (and now Alphas) who would gladly drive a stake through the heart of capitalism if it meant they could get their own dirt.

Implications?

There’s probably a revolution coming. It may sweep away the current crop of governments. It may punish, flog and annihilate a mess of mom-and-pop property investors with a radical rethink of tax laws. It will be unkind to Boomers, residential REITs, institutional landlords and, of course, the more affluent among us. Once the kids take over the House of Commons, for example, a wealth tax will not be far behind.

We’ll say it again. Live quietly among the masses.

About the picture: “Here is a picture of Toby is now practicing for the next Olympics,” writes Scott, “as horse jumping will be dropped in the pentathlon and replaced with dog jumping. Gold for Canada!”

To be in touch or send a picture of your beast, email to ‘[email protected]’.