The Housing Crisis

It is long overdue for all Canadians, but especially politicians and industry professionals, to sit down and have a real conversation about housing. So far most Canadians have the impression that everyone is stepping up to the plate to help build more homes, and on the surface we are. Only on the surface.

What we do not hear talked about is a daunting reality that is facing us all, from policy makers to those who are struggling to find housing in the first place. The housing and real estate market account for nearly 40% of Canada's GDP according to Remax (https://blog.remax.ca/housing-nearly-40-of-all-of-canadas-gdp/) and Statistics Canada. That massive portion of GDP directly deincentivises any federal government from triggering a significant change. If the real estate market % of GDP dropped to 20% as it is in most countries, it would wipe out billions. So much so that Canada's place as one of the largest economies on earth could end.

According to the report over the last 23 years housing in Canada have skyrocketed by nearly 200%. In the same 23 year period the Toronto Stock Exchange only saw a total cumulative growth of 67%.

The issue is the rate of growth in such a short period of time. In 2000 the average price of a home in Canada was $255,000.00; as of October 2023 it is $655,000.00 - a staggering amount of growth. That growth has been encouraged and even touted as one of the reasons why Canada is a "safe haven" for money when invested in our Real Estate market.

That all means that there are very significant consequences from any real reduction in home values. Consider that a majority of Canadians have all of their wealth tied up in their homes, or that governments at all level benefit financially from higher housing prices, or that developers are not incentivised to reduce sale prices. Everyone of the above are in a position to lose significant amounts of money if home values were to drop down to rates that are more affordable.

Even with all of the recent legislation and money being thrown at the problem, there is little indication that home values will actually drop by any effective amounts. Within the industry the calls to reduce interest rates are the bell being rung as the most impactful way to improve affordability. Cheaper money means that people can borrow more, thus being able to afford the higher housing prices. What is not considered in that conversation is the lack of significant movement in household income, which slightly declined in 2022 over 2021.

According to Statistic Canada in 2016 the median household income was $60,400 and in 2023 the median income was $66,800 or an increase of 9.6%. In that same period we saw inflationary pressures of 22.07% which means that most Canadians saw their "real" income decline by 12.47%. OR to use different terminology, their buying power was reduced by 12.47% as there was that much less disposable income.

There are only really two solutions to Canada's housing crisis and I do not believe that either can live in a vacuum. The first is that housing values have to drop, as painful as that might be for some. The second is that average incomes need to increase dramatically.

I have had many conversations with people from around the world who look at Canada's housing market with sincere bafflement. How is it that the country with the 2nd largest land mass with a population of only 40 million have land values up to five times higher than in other developed nations, like the USA, that has a population 10 times the size? Some people claim that it is because so much of Canada is "unlivable" land. The claim is that 80% of the land in Canada is 'unfriendly' to humans... yet we see other nations with similar landscapes that do not seem to have the same issues. I would argue that the issue is more attuned to the fact that we have always, with the exception of a few cities, focused our attention as a nation on developing along the USA border. I also believe that this has far more to do with economics than anything else.

When the Trans Canada rail system was built, it was done so with an eye on trade and linking the populated areas of the nation and to encourage settlement. With the exception of Edmonton and Saskatoon, most major cities are within a few hundred kilometers of the USA border. That means that is where jobs are, infrastructure is located, and so naturally that is where people want to live. Government has never, on the federal or provincial levels, done a very good job at developing these parts of the country. Consider that Russian Siberia, considered far more uninhabitable than most of Canada, has a population of over 33 million people.

So the reasoning that Canada does not have 'livable' land is not completely true, rather it is a case of lack of will to develop more of the country both from Government and Private Industry. That said, we do know that when there is employment available, people will move there. Fort McMurray in Alberta is a great case in point, so too are many northern communities that have seen employment booms.

The reality is that if property values drop exponentially to improve affordability and bring Canadian housing costs into line with most of the developed world, it would result in billions being lost. Property owners, investors, developers, and lenders would see their bottom lines impacted and margins tightened to the extreme. If developers cannot make a profit, there is no incentive for them to build.

The other option is to drastically increase wages to the estimated 75k per annum needed to live in one of Canada's major cities. The issue here is that with employment costs going up, it means that those charges will be passed on to the consumer. Profit margins are the driver of all business decisions, and higher pay means less profit.

According to several Builders Associations the country here are the average costs to build in Canada as of December 2023 (These values include land acquisition costs, all fees, interest, taxes, and costs to build):

• Calgary: $150 to 300 per square foot
• Edmonton: $130 to 240 per square foot
• Montreal: $140 to $350 per square foot
• St. John’s: $130 to $350 per square foot
• Toronto: $205 to 300 per square foot
• Ottawa: $140 to $375 per square foot
• Halifax: $90 to 150 per square foot
• Winnipeg: $130 to 350 per square foot
• Vancouver: $185 to $350 per square foot

Now let us consider the cost per square foot to purchase a home in these areas as of December 2023:

• Edmonton: $204 per square foot avg
• Montreal: $1235 per square foot avg
• St. John’s: $205 per square foot avg
• Toronto: $1013 per square foot avg
• Ottawa: $348 per square foot avg
• Halifax: $902 per square foot avg
• Winnipeg: $348 per square foot avg
• Vancouver: $1141 per square foot avg

Even though it might appear that there are margins there, and with the understanding that new construction will almost always cost more per square foot to buy, the ranges for both may vary.

In Vancouver as an example, the cost to build can be much higher depending on the property and the amenities provided. The average selling price of $1141 per square foot takes into account the lower costs in suburbia, but also factors in much higher per sq foot developments. As an example, one development in downtown Vancouver recently sold out with units selling for over $1800 per square foot.

When you consider average incomes and then look at the average per square foot selling price... they simply do not add up. We either need to see incomes dramatically increase to a minimum of $77,000 per year with housing prices staying flat or slightly moderating down, or we need to see property values drop significantly.

The solution presented by government is to drastically increase rental housing stock and this will work for some. For those who are seeking to buy a home, it does little to nothing, again because incomes are simply not high enough to meet the costs associated with home ownership. The push to build a vast amount of rentals does accomplish greater housing affordability, but it does nothing to make owning a home more affordable.

If we see land values remain flat, and even with wage inflationary pressures, it will take a generation before housing affordability comes inline with incomes. That means that Millenials may end up being the most housing challenged generation since the end of WWII - a very daunting prospect. It also means that their children will struggle to find affordable housing and they will not have the financial ability to assist as the boomers did for their children.

Part of that is due to the cost of housing, but some if it is also due to the exponential increase in personal debt held by Canadians as they attempt to maintain their lifestyle. That means less disposable income, reducing savings, and reduced buying power. The result will be a general slowdown in per person GDP and we are already seeing that today.

Canada's per person GDP earnings are at the lowest since the Great Depression and the indicators are not improving. There are over 2 million Canadians living below the poverty line and over 70% of households say that they do not have the financial means to survive unexpected bills of $1000 or more. To think that $1000 could make or break a Canadian family should give us all cause for concern.

So why is there so little actual initiative to bring down the cost of buying a home as opposed to just building more rentals? Simple, money. Governments at all levels rely heavily on the taxes generated from Canada's housing market. Transfer taxes, GST, property taxes, and more deliver billions into government coffers and any reduction in that revenue is viewed with fear. Government has come to rely so much on this revenue that it drives policy and housing decisions.

This is particularly true of municipal governments who have no incentive at all to see property values drop. If you look at the 200% increase in property values, you also have to consider that for every dollar of value increase the city gets more property tax. As land values have increased, municipal revenue has increased along side. These funds are used to offset salary inflation and other inflationary costs (but never seem to amount to more or better services/infrastructure). There is actually little to no financial incentive for a municipal government to exponentially increase construction, even if we had the trades people to do the work. They only see current revenues and cannot imagine reducing them.

If property values drop it could wipe out billions in wealth for Canadians and the nation as a whole, yet to not see those drops means the housing crisis will continue for decades to come. Canada will also start to see international investment drop as the cost to do business here escalates with land values. Government will be forced to offer more and more incentives, at a cost to the taxpayer, to keep companies investing in Canada and offset some of the increasing costs. So housing drives taxes that are then used to offset the high cost of doing business in Canada for foreign countries because housing is so expensive. So that tax payer is not only paying more in tax, they are also subsidizing multi billion dollar corporations in order to attract investment and employment. Yet the employment figures do not result in a net profit for the tax payer and the income earned by the employees is not substantially higher than the current average. So no better housing affordability.

So in our effort to protect the wealth of the current "in power" generation are we in effect dismantling the future for younger generations? Are we cutting our nose off to spit our own face?

On the surface the problem is easy to solve... build more homes. But unless the costs per square foot to buy come down, more homes does not solve anything. Home prices have to come down and incomes need to come up, there is no other solution that will result in a more balanced and sustainable market.

The problem? No one wants to be the reason why household wealth is eroded by declining values, and the only way to force incomes to increase is to drive minimum wage up to a living rate - in Canada that is currently just over $30 per hour. That would mean minimum wage in most provinces would have to more than double. The impact on the viability of businesses would be crushing, so that is a solution that may cause far more harm that good.

Housing is the foundation of every single society on earth. Our homes are the places where we build community, raise our families, and more. Canada is the only G20 nation faced with declining ownership rates as between 2019 and 2023 the rate of home ownership dropped from a high of 69+ % to just over 66%.

If we as a country cannot find a solution that works, we may find that we are forced into an even worse situation. With household debt skyrocketing, home values and cost of living going up, moderate downward pressure on wages, an increasing unemployment rate, and nearly 2 million Canadians unhoused, with another estimated 5 million underhoused, we may find ourselves in serious economic trouble. 7 million Canadians represents 17.5% of our citizens are in a housing crisis. To put that into perspective, it means that at least 5 people you know are either underhoused, or unhoused - and those are just the ones we know about through self reporting.

We lament, rightly so, the millions of people around the world in refugee camps that suffer from lack of housing and basic human necessities. Our citizens may not be facing war, but how is sleeping on the street in any Canadian city any better that living in a refugee camp? It isn't. When a refugee tells me that they had safer sleeping spaces, more access to food, and medical resources than they do in Canada we have to pay attention. Not for the refugees, but for the millions of Canadians who live in 3rd world conditions.

As a final thought.

Canadians are the first to stand proudly and decry the human rights abuses occurring around the world, yet we all but ignore the plight of our own citizenry.

2 million unhoused Canadians is the same number of people in Gaza that have no housing. The issue in Gaza is due to war. The issue in Canada is purely due to money and a lack of will.

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This article is my opinion based on my own research conducted. Data points were retrieved from the Fraser Institute, Statistics Canada, The Canadian Builders Association, the Canadian Bankers Association, CMHC, REMAX, and the New York Times.