The consequences of the 2008 Financial Crisis and the remedies initiated by the Federal Reserve to deal with it have reverberated throughout the global housing markets during these past 10 years.
Readers may recall that in late 2008, the U.S. Federal Reserve implemented a money-printing program euphemistically referred to as Quantitative Easing (“QE”) in order to prevent a total collapse of the global financial system. In colloquial terms, the Fed, the White House and the United States Congress co-operated to bail out Wall Street after they screwed up.
Money-printing causes price inflation in that more dollars are chasing a fixed quantity of assets. This has been particularly true for real estate, both in Canada and around the globe.
There is a relatively fixed quantity of global real estate being chased by trillions of U.S. dollars, the global reserve currency, created out of thin air since late 2008. If you think that only Toronto and Vancouver are undergoing rapid increases in real estate prices, think again. For example, take a look at Amsterdam and Berlin.
Hence, because Canadian real estate is both limited in quantity and high in demand by both Canadians and foreign investors, QE has in large part caused the rapid increase in house prices, particularly in our urban centres. For example, on January 15, 2009, the average price of a detached home in Toronto was $449,367. As of September 20, 2019, the average price has skyrocketed to $1,031,848, an increase of approximately 129% in just over 10 years.
If you were fortunate enough to have acquired real estate ten years ago or earlier, your net worth has probably increased significantly during this past decade.
On the other hand, if you didn’t have that opportunity, you’ve probably seen your net worth remain the same or even decrease as rental costs have skyrocketed during the same period. The problem is that there are many more people in the latter situation than the former, resulting in our current housing crisis.
How can this be fixed?
I propose that the Government of Canada invest in the creation of affordable housing stock that would be available for rent, rent-to-own or purchase by Canadian residents of modest financial means (i.e., both low to mid-income and low to mid-net worth). Here’s how it would work:
- Applicants would be required to disclose both Canadian and foreign sources of income and assets for the household unit. “Household unit” would include the applicant and immediate family members, including family members living abroad. It’s increasingly common to see wealthy non-residents provide financial support to Canadian resident family members who, on paper, have no income or assets. Such financial disclosure on the part of housing applicant(s) would have the goal of providing affordable housing to those who really need it, rather than to ostensibly low income/low net worth individuals who have access to foreign wealth.
- There would be restrictions from acquiring affordable housing for investment purposes. That is, housing would only be used as a primary residence. The Government of Canada can enforce this rule by penalizing a purchaser/investor for the difference between the acquisition cost and the market price for a similar unit. Enforcement of this penalty can be secured by way of a lien over the property.
Although such a housing program may require a significant initial outlay by the federal government, it will pay for itself in the long-run – if people spend less money on housing costs, they’ll have more money to spend on goods and services, which ends up stimulating the economy resulting in increased tax revenues for Ottawa’s coffers.
Another recession appears to be imminent, so the construction of affordable housing stock would result in an effective stimulus to the economy. Moreover, with discussion among economists about implementing negative interest rates to fight the next recession, housing may become even less affordable if banks actually start paying borrowers to take out mortgages to purchase real estate. Therefore, the time to act is now will be sooner rather than later.