Hands off my housing bubble!

Canada’s housing bubble is the economy’s biggest risk—and its biggest driver. Now governments want to cool it down.

(Martin Barraud/Caiaimage/Getty Images)

(Martin Barraud/Caiaimage/Getty Images)

Tony Joe, a real estate agent in Victoria, received a predictable earful last spring when he distributed flyers that screamed: “Investors and foreign buyers want your property!” The glossy mailouts touted Joe’s connections to—you guessed it—China. “I got a lot of flack,” says Joe, who has been selling homes in the balmy Vancouver Island city for 25 years. “I got nasty emails and tweets.”

The backlash shouldn’t have come as a surprise. Nearby Vancouver was in the grips of a housing affordability crisis blamed on a flood of speculative Chinese money, and some Victoria residents feared their sleepy seaside city was about to tumble down a similar path. But then a funny thing happened. Joe’s phone started ringing and it didn’t stop. “Honestly, it was a very successful campaign for us,” he says. “There were a lot of people who said, ‘‘I know you deal with a lot of Chinese, can you sell my property?’ ”

For all the outcry about mainland Chinese money driving house prices out of reach in Vancouver and Toronto, it’s easy to forget the biggest beneficiaries of the largesse have been Canadians themselves. In fact, Vancouver recently became Canada’s first “city of millionaires” as rising real estate prices—the average detached home in Vancouver costs $1.5 million—pushed average household net worth up seven per cent to just over $1 million in 2015, according to a recent study by Environics Analytics. As financial problems go, it could clearly be a lot worse.

The downside, of course, is the impact of nosebleed prices on first-time buyers. With moss-roofed bungalows selling for more than $4 million in some desirable Vancouver neighbourhoods, many local residents were understandably feeling priced out of their own city. So B.C. Premier Christy Clark’s government, bracing for an election, decided in late July to roll out an unprecedented 15 per cent tax on foreigners who purchase Vancouver houses. It worked—maybe a little too well. Vancouver house sales plummeted in August (down 26 per cent) and September (down 33 per cent) with prices expected to follow. Now some fear a painful correction could be in the works.

B.C.’s experience highlights the dilemma Canadian policy-makers face as the Trudeau government begins to roll out its own measures to tame the housing market. Those feeling shut out want more affordable prices. But the only way for that to happen is for incomes to grow massively or for house prices to fall. Yet, the majority of Canadians—70 per cent—now own their own homes and have built up enormous wealth, at least on paper. If prices nosedive, it will threaten their prosperity. As if this quandary wasn’t enough, politicians now face an even thornier problem: with the rest of the economy running on fumes, Canada finds itself far more dependent on real estate than ever. The housing sector—and the construction that underpins it—now ranks as Canada’s single biggest industry, comprising 12 per cent of GDP. That figure expands to 20 per cent if related industries like finance and legal services are included, and even higher when you consider the “wealth effect” of steadily rising home prices is also behind everything from sales of luxury cars to designer clothing.

Related: China is buying Canada. Inside the real estate frenzy.

Even economists who once lauded government efforts to cool housing are now expressing reservations about taking further action. “Unfortunately, the pillars of our economy have for too long been oil, manufacturing and housing,” says Sherry Cooper, the chief economist at Dominion Lending Centres. “So if you knock out that third pillar at a time when oil prices are weak, Alberta is in a recession and manufacturing is unable to replace that growth, we would have a very weak economy. There would be fewer jobs and income growth would decline.”

How did we get here? Years of relative government inaction on the housing file are one reason. Failure to grasp the potential impact of foreign money on Canadian real estate is another. But much of the blame falls on the shoulders of individual Canadians. The Bank of Canada warned for years about the dangers of homeowners getting in over their heads. But Canadians brushed off those warnings and loaded up on debt—the average household now owes a record $1.67 for every dollar of disposable income it earns. Meanwhile homeowners steadily ratcheted up their expectations of how much their house will be worth in the future when it comes time to sell it. More than one-quarter of Canadians, by some estimates, are banking on the sale of their home to fund their retirement dreams. They will understandably be furious with any elected official who, in a bid to save homeowners from themselves, inadvertently kicks their golden goose into the abyss.

If Canada’s real-estate-dependent economy follows suit, so will everyone else.

Finance Minister Bill Morneau makes an announcement on housing in Toronto Monday, October 3, 2016. The federal government has announced measures intended to stabilize the real estate sector amid concerns that pockets of risk have emerged in some housing markets, particularly those in Toronto and Vancouver. (Nathan Denette/CP)

Finance Minister Bill Morneau makes an announcement on housing in Toronto Monday, October 3, 2016. (Nathan Denette/CP)

This week Federal Finance Minister Bill Morneau took the wraps off a new set of measures aimed at reining in the housing market—by far the toughest yet. Effective Oct. 17, homebuyers who put down less than 20 per cent of their new homes’ value—and are therefore required to purchase taxpayer-backed mortgage insurance—will face tougher rules to qualify for a mortgage. Homebuyers seeking a five-year fixed mortgage, by far the most popular term, must prove they can make their payments at a higher rate than those they’re being offered—usually the Bank of Canada’s conventional mortgage rate, which is currently 4.64 per cent. That’s nearly double the rate many homebuyers qualify at today. In November, there will also be changes that impact banks’ ability to access government-backed insurance for higher-quality mortgages too, making it more difficult for lenders to access funding through the Canada Mortgage and Housing Corp.’s mortgage securitization program. “Our goal is to make sure we can manage the risks in the market for the long term,” Morneau said during a press conference in Toronto, during which he seemed eager to reassure both homeowners and non-homeowners alike. “We’re looking for ways that we can ensure people’s investments in their home are stable.”

Related: Canada’s economy is hostage to the housing bubble

Far from making housing more affordable, the moves have the potential to limit the number of first-time homebuyers who can enter the market in the short-term. Genworth, a private provider of mortgage insurance partially backed by taxpayers, says more than one-third of insured mortgage borrowers may have difficulty meeting the new lending standards, and would have to consider buying a cheaper home or making a larger down payment.

It wasn’t all bad news for first-time buyers. Morneau also tossed a bone to those convinced foreign money is responsible for making housing unaffordable in Vancouver and Toronto (as opposed to Canadians bidding up house prices themselves by taking advantage of interest rates as low as 2.17 per cent for a five-year fixed mortgage). He promised to clamp down on what’s been described as a “loophole” in Canada’s tax laws that allows foreigners to improperly claim a principal residence exemption when selling their homes. Going forward, only people who were residents of Canada when they purchased their home will be able to avoid paying capital gains after they sell it.

(Statistics Canada/Bank of Canada/Maclean's)

(Statistics Canada/Bank of Canada/Maclean’s)

Taken together, the new measures “should help to reduce the risk of a housing market correction in Vancouver and Toronto and a broader retrenchment in Canadian household spending arising from elevated debts,” wrote Sal Guatieri, a senior economist at BMO Capital Markets, in a note to clients. But as Cooper observed in a note of her own, the changes—which apply right across the country, including cities like Calgary and Edmonton where home prices are already falling—could also substantially reduce housing demand and cause prices to decline. “This, of course, is not what the 70 per cent of Canadian households that already own a home would like to see.”

Jonathan Weisman is one of those Canadians. The Vancouver lawyer sits on the board of the Dunbar Residents Association. He says he and other homeowners are “tremendously concerned” about the impact of risky new government policies aimed at promoting housing affordability on their coveted West Side neighbourhood, where a modest, 70-year-old bungalow sold for $4 million earlier this spring. Like himself, Weisman says many residents scrimped and saved to buy a slice of West Coast paradise: a detached home on a large, suburban-sized lot in a leafy neighbourhood that boasts views of Burrard Inlet, the North Shore mountains and downtown Vancouver’s forest of glass condo towers. “They shouldn’t be penalized for owning something that’s valuable,” he says.

For sale sign in Vancouver, May 3, 2016. (Photograph by Jimmy Jeong)

A for sale sign in Vancouver, May 3, 2016. (Photograph by Jimmy Jeong)

So far, Weisman’s concerns seem justified. Whereas Ottawa took several months to develop its latest cooling measures, B.C. rushed its foreign-buyer tax into effect on Aug. 2 after collecting just five weeks of data that suggested offshore buyers, mainly from China, were purchasing one of every 10 homes in the city. The impact of the surprise move was as shocking as it was sudden: foreign nationals accounted for 13 per cent of all home purchases in Metro Vancouver in the seven weeks prior to the tax, but plummeted to less one per cent in the four weeks following. But foreigners weren’t the only ones who stopped buying. So did everyone else. “The market’s gone cold,” says Keith Roy, a local agent. He points to his neighbour’s house across the street. Worth as much as $1.85 million back in May, it was put up for sale several weeks ago for $1.8 million and the price has been dropped twice since. “It’s now down to $1.6 million,” he says. “No action.” Not to be outdone, Vancouver Mayor Gregor Robinson has announced plans to begin taxing homes that are left vacant as early as next year.

Toronto homeowners could be next on politicians’ hit list. Although Ontario Finance Minister Charles Sousa has so far resisted calls to implement a Vancouver-style foreign buyers’ tax in Toronto—at least until he has time to see how B.C.’s levy plays out—Benjamin Tal, the deputy chief economist at CIBC World Markets, argued in a recent note that Ontario has “little choice” but to follow in B.C.’s footsteps as foreign buyers swing their focus away from Vancouver. Some homeowners in Canada’s biggest city are eager to cash in while they still can. Local agent Victoria Boscariol says she now receives at least one call a week from someone with the following message: ‘‘I’ve got this property and I want to sell for a high price to the Chinese.”

(Dallas Federal Reserve)

(Dallas Federal Reserve)

To date, the discussion over soaring house prices has mostly been dominated by would-be homebuyers priced out of the market, as evidenced by a recent 200-person rally in Vancouver organized by a group called Housing Action for Local Taxpayers (HALT), and last year’s #DontHave1Million social media campaign (which should be updated to #DontHave1.3Million, based on the 30 per cent price gains Vancouver experience over the past year). But that could change if Canada’s silent majority of bubble beneficiaries feel their prosperity is suddenly at risk. “The trend toward owning versus renting has been powerful and broad-based,” wrote Tom Bradley, the president of Steadyhand Investment Funds, in a recent blog post. “So, do 70 per cent of Canadians really want to see the value of their homes go down? If a [Vancouver] West Side home drops from $2.3 million to $1.5 million, will the owner be pleased with the political leadership?”

It’s also difficult to overstate the degree to which the entire country—both homeowners and renters alike—has become reliant on rising house prices to keep the lights on. Emanuella Enenajor, a senior economist with Bank of America Merrill Lynch, says residential construction is responsible for a full third of GDP growth over the past two years. “It’s the highest we’ve had, pretty much, on record,” she says.

Rising house prices have contributed mightily to the net worth of Canadians, which clocked in at $9.84 trillion at the end of the second quarter, or $232,000 per individual. That, in turn, makes them feel richer and spend more, giving the economy a boost. According to BMO economist Alex Koustas, there’s been nearly a 40 per cent increase in sales of luxury vehicles that cost more than $90,000 over the past three years. Meanwhile, a stampede of high-end U.S. retailers, from Saks Fifth Avenue to Nordstrom, have rushed to set up shop north of the border to take advantage of a large and well-heeled, if increasingly indebted, clientele. There’s been a cultural shift, too. In recent years, Canada emerged as a centre of reality-TV programs focused on real estate, exporting no-nonsense stars like Mike Holmes and the winsome Property Brothers to U.S. audiences.

The growing number of made-in-Canada reno shows, including Holmes on Homes, highlights our preoccupation with wholesale re-dos. (HGTV)

Mike Holmes, right, hosts one of the many Canadian reality television shows focused on real estate. (HGTV)

The end result is an economy where all roads lead back to home ownership. Just as the post-2009 resource boom reoriented the economy around oil production—workers left the Maritimes for higher paying jobs in Alberta, heavy equipment manufacturers in Ontario pulled back from overseas markets to focus on the oil sands—the housing boom of the last decade sucked in resources from across the economic spectrum. The number of people working as real estate agents in Toronto alone has doubled over the past decade to about 40,000. “Canada doesn’t have a lot of hard, timely information on this,” says Enenajor. “But real estate has been one of the best-performing sectors of the economy from a price and activity perspective. It would be naive to say this hasn’t had an impact on people’s choice of what kind of business they’re setting up, or the types of employment opportunities that people are pursuing.”

Governments are also held hostage. B.C. recently noted that the $2.2 billion it took in from real-estate-related taxes last year was more than it received in royalties from the mining or forestry industries. It even outstripped revenue from gambling.

What benefited from real estate’s rise will suffer if Canada’s housing boom goes bust. Avoiding such a scenario is key. But engineering a fabled “soft landing” of the housing market is like ditching an Airbus A-320 on the water. Sure, Capt. Chesley “Sully” Sullenberger piloted Flight 1549 gently into the Hudson River six years ago, saving the lives of all 155 people aboard, but there’s a reason why flight attendants joke privately about the pointlessness of all those life jacket demonstrations.

It’s unfortunate that Ottawa didn’t take more assertive steps to bring the housing market to heel back five years ago when Canada’s economy was still the envy of the world. Now, the country finds itself in the unenviable position of having to explore untested and ever-riskier measures—B.C.’s move to discourage foreign buyers is a good example—to cool house prices at a time when GDP growth is limping along at just 1.2 per cent. “It would be a very bad thing if foreigners were to sell properties in Canada, because all of us—homeowners or not—would experience a very significant slowdown in the economy,” says Cooper, who worries governments are being motivated more by political promises to help the middle class than they are by sound economic judgment.

Of course, that assumes the middle class actually wants to be protected from rising prices. Roy, the Vancouver agent, isn’t so sure. “Everybody believes in affordable housing,” he says, “until it comes time to sell their house.”


Hands off my housing bubble!

  1. The federal government has done absolutely nothing to address the housing issue. No attempts to tackle foreign money laundering. They have been unwilling to pursue tax fraud. And they want to increase the number of immigrants and foreign students.
    Shouldn’t the government be worrying about housing for the people who are already here first?
    You can email Minister of Families Jean-Yves Duclos, Finance Minister Bill Morneau, Revenue Minister Diane Lebouthillier, Immigration Minister John McCallum, and Prime Minister Justin Trudeau, at the below email addresses. It would also pay to email your local MP.

    Jean-Yves.Duclos@ parl. gc. ca
    Bill.Morneau@ parl. gc. ca
    Diane.Lebouthillier@ parl. gc. ca
    John.McCallum@ parl. gc. ca
    Justin.Trudeau@ parl. gc. ca

    • We need immigrants just to care for the retiring boomers. We need even more (according to an article I saw today) if we want to maintain historical levels of economic growth. Sadly, everyone in Vancouver is quick to blame faceless foreign buyers, because they are easy to blame. Without better zoning rules and a coherent development strategy from the province and city hall, I think prices will keep climbing, although the new rules will at least knock out some precarious buyers for a while. What Vancouver needs is “densification”, better transit, and community planning to counter NIMBYism.

      • You have good points re densification, transit, and better planning for sure, but the ‘blame game’ is passe. Many major cities worldwide are savvy to the destructive influence of increased foreign money (key words: an excess of foreign money, not foreigners) in real estate and its negative impacts on affordability and homelessness, and they are trying to do something about it in support of their local citizens as well. It is well documented. Vancouver has seen a lot of quick flipping, and an influx of excessive foreign money from dubious origins, not to mention lax regulations and large political donations from people and industries that benefit from it all. That our economy has come to rely on it at the expense of the poor and middle class is sad.

    • A majority of Canadians are immigrants themselves or children or grand children of immigrants. They are building this great country no mater when they come. Housing is a reward for only the best smart + hard working people. The fact that somebody was here first does not give him/her such reward. He / She needs to work more to compete and earn the reward.

  2. I applaud Morneau’s actions. It is a long term initiative albeit with short term effects. Of course there will be pockets of people (in toronto and Vancouver) who wish they had sold their home before these changes. But the government must look out for all Canadians even if they don’t understand the risks. How else could he get Banks to assume more of the risks of a bust? The effect will be a tightening of credit.

  3. Sayeth the article:
    “More than one-quarter of Canadians, by some estimates, are banking on the sale of their home to fund their retirement dreams.”

    Well, naturally many home owners expect to downsize after retirement and unlock some of the equity they’ve built up in their homes. That’s perfectly reasonable.

    What’s not reasonable, however, is basing your retirement on your home appreciating more than the historical norm. Anybody whose retirement is dependent on the hyper-appreciation of their home did not do proper retirement planning and, frankly, does not deserve a whole lot of sympathy should Vancouver see a correction.

    The one class of people I would have sympathy for is young people who scrimped and saved to get into the housing market only to see their equity evaporate. It may be cold comfort but their one silver lining is that they are young and thus have time on their side.

  4. I was born and raised in Mr. Weisman’s neighbourhood, and in my opinion, his comments really don’t reflect the sentiment in this part of town. Most homeowners are more concerned about the changing face of the neighbourhood/city, and the fact that many of their children are being forced to move away than the extra paper wealth that they will likely never realize. Most I know couldn’t care less if their house is worth 3 or 4 million, they aren’t planning on going anywhere, what does it matter? The city will be absolutely unrecognizable in 10-20 years if nothing is done. (for the record, I own property in the city, as does my family)

    • Well, I guess if “Most homeowners are more concerned about the changing face of the neighbourhood/city, and the fact that many of their children are being forced to move away than the extra paper wealth that they will likely never realize” so the best way is to sell their home to their own children.

      • Silly comment. My children will need a home to start raising their own children in before I am ready to sell my own home and move to assisted living, don’t you think?

    • “Most I know couldn’t care less if their house is worth 3 or 4 million, they aren’t planning on going anywhere, what does it matter?”

      Yeah, but they will absolutely care when they change their minds and want to sell their houses. Of course instead of 3 or 4 millions, they can sell them with 500K so a young Canadian can afford to buy….However I don’t think they would do so when the time comes. Every home owner I know always asked for the highest possible price. That is the reality and that is the way it must be. Don’t you think so ?

      • I would sell lower if I knew I could buy lower on the other end. But again, instead of relying on my house value for retirement, we actually have been saving for that as we should….of course, that is because our mortgage was reasonable to start with. Our home has always been just that – a home to live in. I may not make millions in profit if the bubble bursts, but I will be able to live with myself and hopefully will be able to retire close to my grandchildren and in a healthy and diverse community.

  5. So we are in a severe bubble today in Toronto and Vancouver because the federal government used housing as a crutch for the past decade. It’s tough to say, well if it pops now what are the consequences. It will eventually pop and the larger it is the more it will hurt.

    Also, I believe it is 70% of households own their home, not 70% of Canadians. 70% was where the US reached in their boom, and Australia too. It is a very high level of home ownership. It will drop to 60-65% when the bubble pops. Long way down!

  6. The problem is the Chinese come over buy a house and do not declare residency. So they do not pay income tax yet their family is taking advantage of the country and its benefits including roads and schools. Then when they sell their house it is principle use property so they do not get taxed on capital gains.

    The problem is not real estate but it is the interpretation of residency. These people should be paying income tax in Canada as their family lives there, they have permanent ties, and they have Canadian passports. That would fix all the problems.

  7. The last batch of people to enter the market always lose, whether it’s real estate or stocks. Given the prices has been going up 2 digits for years, and 30% this year, it is a high risk to buy properties this year.

    Since the properties prices went up 30% this year, a 30% correction will just be 9% below last year’s price. It sure isn’t much. A 40% correction will be 22% below last year’s price. People who bought more than 5 years ago shouldn’t lose much money. Vancouver housing prices is still too high even with a 40% correction. A doctor or a lawyer’s salary can barely afford a detached home.

  8. kudos to Eric Sorenson on one of the better balanced analysis so far….no one comes out clean in all this…there is some ‘garth turner’ (we’re all house horny and moist for real estate, blaming our woes on the chinese dude), and also acknoledgement of the fact how we’ve had lame tax/financial regulations/loopholes for way too long…and of course the Fed’s printing of cheap ‘have it all now’ interest rates.
    all lead to speculation, greed, fomo and rising prices in a repeat circle ad nauseum to our current ‘perfect storm’.

  9. In hot Canadian housing markets like Vancouver, Toronto, and Victoria, there is usually no negotiation in a “bidding war” – your first bid has to be your best and final offer. Contrary to common belief, it is not an auction in the traditional sense.

    The offer process leaves all interested buyers in the dark which leads to desperation and encourages ridiculous over-the-top offers that not only unnecessarily inflates the price of that property but every other property in the market leading to exponential increases over time.

    We need to implement a secure real-time online bidding system for all offers made during a sale or assignment process where all interested buyers and the seller can monitor, with appropriate privacy protections, all offers that are made on the property as they are submitted.
    All system users and transaction stakeholders must be properly authenticated and registered.
    The system must be accessible to unrepresented buyers and sellers as long as they too are properly authenticated and registered.
    The system must include appropriate measures to reduce the probability of fake offers and to clearly identify any detected fake offers to all stakeholders in real-time.
    Require that the offer ultimately accepted by the seller must have been submitted via the system in accordance with all applicable procedures.
    Require that property ownership be transferred to the party identified in the accepted offer.
    The system will enable buyers to confirm that their offer has been submitted and confirm that, in fact, there are multiple offers that have been received on the property, and review the price and any conditions of all offers in an open and transparent manner, while removing the guessing game aspect which is currently frustrating many buyers and encouraging frantic over-bidding.
    The system will become the electronic registry of all residential real estate transactions in each province and the CRA won’t need to rely on forms to be submitted with tax returns.

    A transparent process of handling multiple-offer situations needs to be part of the solution.

  10. It took my parents generations of paying taxes and voting to build a great country like Canada. But a foreigner can buy a property and price me out of the city where my family lives and not pay any tax in doing so. Why pay or invest in infrastructure? Not from my income any more! I don’t really like Canada anymore. Over priced and do not ensure benefits for long-term Canadians. Dear home owners. Go f yourself. Sell out your kids. I could care less what happens to you in the future.

    • Vote against infrastructure. Why invest in Canada? Why would the youth pay for the debts of infrastructure? So we can make sure home owners can sell at a nice tidy price to a foreigner in the future.

    • The Canadians who sold their property got benefit when selling at top $. They did invest in infrastructure by paying taxes with their incomes. They worked hard to build this great country. They deserved what they did. Why don’t we just learn from them instead of trying to limit the value of their houses?

  11. A pretty courageous thing the Clark government has done, most governments are too corrupt to act. Because of zero and negative interest rates, asset price inflation like in housing is happening all over the world. There isn’t much else happening in the Canadian economy, so housing seems to be the only game in town; it is no longer about having a roof over your head but a means for the average joe or jane (and the Chinese money launderer) to win the lottery. It shouldn’t be this way, but there we have it.