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February 26, 2013

Canada’s Housing Bubble or Why Housing Cannot Be Left as a Private Good

SS Editorial

Housing Bubble

Housing is the single biggest component of the cost of living (26% of the Canadian Price Index - CPI). Given that consumer spending makes up 60% of the total GDP (1.5 Trillion dollars), what happens in housing is critical to the economy and the living standards of Canada’s workers – especially when wages are stagnant and social wages like education, healthcare, and pensions are under attack – with the austerity assumption that private assets, like housing (or savings like RRSPs), will make up for declining purchasing power.

Yet housing affordability has worsened. Since 2000 housing prices have risen 127%. The ratio of income to house prices has gone from three times the average household income in the 1970s to five times by 2012. Saving for a down payment has risen from five to ten years (and in Vancouver’s case to fifteen years where house prices are ten times average household income).

Housing costs (mortgage, taxes and utilities) have also risen from 30% to 50% of average household disposable income ($70,000 per year) and, in certain metropolitan centers like Vancouver, to 80%.

Still, with cheap money, the claim to home ownership has risen from 62% to 70% of Canadian households in the last generation. But total household debt has risen from 102% of income in 2000 to 164.6% in 2012. If there is another recession, there could be very serious consequences from a housing bubble.

Preventing or Promoting a Housing Bubble?

Since the international recession of 2008, the federal government has revised Canada Mortgage and Housing Corporation (CMHC) mortgage insurance rules four times to guard against a housing bubble triggering a made in Canada recession: to cut insured mortgages from 40 to 25 years and to cut refinance percentages from 95% to 80%.

Since 75% of Canadian mortgages have to be insured (if less than a 20% down payment is made) and mortgages represent 800 billion dollars, or one half of the annual GDP, mortgage debt is the single greatest domestic threat to the economy and workers’ standard of living. In fact, CMHC was instructed by the federal government to buy up 70 billion dollars of private bank mortgages to prevent any credit shortage in 2008-09. Here is the other side of Harper’s Job Action plan in combating the recession of 2008.

But if there is a sudden contraction in demand for Canada’s exports, one third of the national economy based on sluggish American demand, or even a modest house price decline of 10% (houses being the single largest domestic asset), the IMF has predicted the Canadian economy is headed for a 2-3% GDP fall with unemployment likely to double.

Should housing, therefore, be treated as a private or public good, whether in terms of human need or economic management?

Housing as a Publically Subsidized Private Good In the pre-1945 era, less than half of Canadian households owned their home. Mortgages were hard to get as only Trusts and private individuals lent money for this purpose at high interest rates. Usually, a lender required a 50% down payment before risking a loan.

After World War Two, the Canadian Liberal government developed a social contract with veterans, and then working Canadians, to provide credit to individual families to buy homes. At first, this had to be done publically through CMHC, which required a minimum 25% down payment and mortgage insurance payments. This proved so profitable in the post-war boom that banks in the 1950s were allowed to do mortgage lending and CMHC retreated to mortgage insurance.

The federal government also moved into public housing for disadvantaged and low-income households (the elderly and the working poor) – for the first time defining housing as a public good on a national scale. At its peak, CMHC was spending two billions dollars a year in 1996-97 (with matching provincial expenditures).

Between 1970 and 1985, CMHC expanded its public housing mandate to include subsidization of mixed market rental housing for tenant co-operatives and not for profit housing societies. This program represented 10% of all housing starts in the early 1980s. For the first time housing was treated a public good beyond the question of poverty alleviation – that ordinary Canadians would have housing costs partly supported as a social wage.

But the Mulroney Conservatives abandoned the public rental housing strategy in 1985, the Liberals stopped any further federal funding of new public housing in 1993, and the Harper Conservatives abandoned the whole field in 2007. This has made housing as a public good a provincial responsibility with a charity mandate. In practice, public housing has become a municipal responsibility where only the largest metropolitan cities can take on this task – such as the Toronto Community Housing Corporation or Vancouver’s struggle to develop supportive housing for the homeless.

As a result less than 1% of Canada’s housing stock today is public.

But that doesn’t mean that housing is a pure private market good. As can be seen by CMHC mortgage insurance subsidies for the banks, tax expenditures (like property tax and renovation tax credits – not available to renters), and outright subsidies like Vancouver’s Olympic Village development, it is public policy to use public money to promote housing as a private good.

Market economists complain that public housing and rent controls ‘distort’ the market. The market is already distorted and the growing affordability gap, especially for the next generation, is a sign of market failure.

What Could be Done? Shelter is the single largest cost of living expense for working Canadians and it is potentially the single biggest destabilizing factor in the domestic economy. Leaving housing as a private good is irresponsible. It increases the potential for homelessness and for working people to suffer catastrophic saving losses as shown in the American sub-prime mortgage meltdown.

A planned long term public approach (which has to include the fiscal capacity of the national government) to market rental housing, home ownership, and urban infrastructure would socialize one of life’s biggest expenses.