Hard talk about the housing bubble

The big news in Toronto and the rest of the GTA is the housing bubble and what to do about it. Like many others, I am not optimistic. Understanding the details of the problem shows why.

Houses like these in the GTA now cost well over $1 million

The average price for a detached house in the GTA in February 2017 was $!.21 million, 32.5% more than a year earlier. For all types of residential housing the average price was $875,983, up nearly 28% from the year earlier. (Toronto Star, March 3, 2017)

There is little doubt that this is a price bubble, driven by speculation, and the cost is being paid by first time home buyers. If you own a home in the GTA you can sell into this hot market, pay no capital gains tax if it is your principle residence, and buy a new one. But the high cost to buy a house is almost an impossible barrier for all those not in the market. That means young people just starting out.

Let’s say you want to purchase a home for one million dollars. First you will need 20% down. That is $200,000. Closing costs will range between $15,000 and $40,000. You will still have to raise a mortgage of $800,000. Then there are taxes, heating, repairs and all the rest.  It is estimated that you will need a combined yearly household income of at least $190,000 just to qualify for the mortgage, and even then, paying the monthly costs of owning a house will be a real burden.

Check out this website on the affordability of housing. “Can I afford a million dollar home?” https://www.ratehub.ca/blog/can-i-afford-a-million-dollar-home/ It shows how difficult it will be for people to get into the housing market. Yes, some individuals and couples have yearly incomes in the $200,000 range. Others have access to family money, but on average the price of housing is making home ownership an impossibility for most.

There are strong hints that the provincial government will act to try and deflate the housing bubble as early as next week with the provincial budget. It is likely that it will be a tax on foreign buyers. They can’t vote so they are an easy target. In Vancouver a 15% tax was put on all foreign buyers and that did depress prices by nearly one-fifth. http://www.huffingtonpost.ca/2017/02/15/vancouver-average-house-price-january-2017_n_14775268.html

Similar moves in Ontario will help deflate the bubble, but my guess is that it will not have as dramatic an effect as in Vancouver. The GTA does not have the same proportion of foreign buyers bidding up the price of houses. Ontario needs to do more to reign in the rising prices, but they are reluctant to act too aggressively. The fear is it could lead to a rapid downward spiral that depresses prices across the province. And don’t forget that there are millions of middle class and upper class homeowners in Ontario who have benefited enormously from the price inflation. They will not be happy to see their net worth dramatically decrease.

My prediction is that the Wynne government will tinker a little, but it will do very little to reduce the cost of housing. This is a strategy of dampening demand. If we are ever to going to deal with the problem of housing, it is essential to work on the supply side by providing more affordable housing, especially affordable housing for families.

And that is why I am not very optimistic about controlling the cost of housing. We lack the political will to solve the problem. Our governments, both federal and provincial, are not willing to develop a comprehensive housing policy that controls speculation and provides good homes for people of all incomes. We are a very wealthy country but we are failing those with middle and low incomes who cannot get into the housing market.

 

2 thoughts on “Hard talk about the housing bubble

    • I agree with this Brenda. The most innovative Canadian housing policy was in Pierre Trudeau’s day when the federal and provincial governments funded co-op and non-profit housing. Since the early 1990s Canada has not had a housing policy and people are suffering. Let’s begin the campaign for affordable housing. Bill

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