Canada’s housing market has reached a fever pitch, but if it is any consolation, many other countries are sailing in the same boat.
A recent OECD survey shows a pretty steep increase in home prices – 40 countries saw increases of 25% since 2015. In 26 of those countries, increases have been greater than 40%, and in 14 countries, above 60%.
It may seem that the Canadian market has risen a lot – which it has, with an increase of 65%. But actually, Canada is eighth on the list, behind Turkey (up 140%), Hungary (+105%), the Czech Republic (+90%), Russia (+80%), New Zealand (+76%), Portugal (+68%) and our neighbours to the south, the U.S. (+67%). Among those between 40% and 60% growth rates we find China (+51%), Germany (+57%) and, right behind Canada, Mexico (+58%). The OECD average shows home price increases of 48%.
At the other end of the scale, we have countries such as Italy, where home prices have barely moved since 2015. Other small increases include Japan, with a home price increase of 19%, France, at 24%, and Sweden and the United Kingdom, both at 39%.
Most remarkable is how rent increases have stayed well behind the rise in house prices. Canada is among the most notable in this respect, rents having risen by only 11% since 2015, a situation that is replicated in many other overheated markets, notably in Portugal (+14%), New Zealand and the Czech Republic, both at +19%. Among countries with less stratospheric growths, France, Australia and the United Kingdom starkly stand out, rents having increased by only 1%, 2% and 9% respectively. Japan and Greece are the two outliers where rents have pedalled back: -1% and -7% respectively.
Would You Move to Boise, Idaho?
As the OECD report points out, inside each of these markets, disparities can be extremely wide. In Canada, this is not news. While the national aggregate home price increased 17%year-over-year in the final quarter of 2021, according to Royal LePage, and prices in the Greater Toronto Area are in line with that aggregate, prices grew by 34.6% in London Ontario, and by 7.8% in St.John’s, Newfoundland.
Larger cities everywhere are the epicentres of the rise, but something new appeared after COVID: we see the emergence of the overheated secondary markets. In the United States, a small city like Boise, in Idaho (pop.: 462,000) experienced a yearly hike of 18% over the last five years. “No one expected Boise to be a booming market,” says Brian Bernard, Director of North American industrial equity research at Morningstar. During those years, the population of Boise grew only by about 1.8% a year. “I think work-from-home has been a huge factor in the migration to some markets, like Boise, combined with the fact that many receiving markets have a short supply of houses,” notes Bernard.
An IMF blog highlights four main drivers of this housing bull market, including low interest rates, government policy support, and the shift to work from home. The fourth reason? The fundamentals of demand and supply.
Interestingly, contrary to what happened in the run up to the financial crisis of 2008-09, no one identifies this as a housing “bubble”. “We don’t see this as a bubble, at least not in the U.S.,” says David Sekera, Chief market strategist at Morningstar. What the market is experiencing is an important shortage of housing supply. “Supply of existing homes is at an all-time low,” notes Bernard, while new home constructors “are struggling to put in infrastructure and don’t have the pipeline to meet demand.”
One major consequence of the present boom is that houses are moving away from small earners and first time buyers. “You find nothing at the entry level of US$ 200,000, yet that’s where you most need new supply,” Bernard says. The IMF picks up the same theme: “The post-pandemic working arrangements could also exacerbate inequality concerns as high-earners in tele-workable jobs bid for larger homes, making homes less affordable for less affluent residents.”
What’s a ‘House’, Anyway?
Many fundamental historic trends throw light on the present situation, reports James McKellar, professor of real estate and infrastructure at the Schulich School of Business, York University. One trend is the considerable rising expectations of what a house is. “The average house in 1950, he recalls, had 850 square feet; now, it is 2,000 square feet.” The occupancy ratio, then, was 4.2 people; today, just above one. “We expect a large kitchen, an en suite bathroom, and now two offices, and these expectations prevail all over the world, in Indonesia, China and elsewhere.”
Previously, continues the professor, as people aged, they would move to smaller houses or move in with their children, but not anymore. “People are not giving up their homes,” he observes. Also, in the 1950s and 1960s, people used to rent out their basements. Not so today. In fact, zoning laws severely restrict multiple dwellings. All these factors contribute to compress the available stock of houses.
Out of Stock, Out of Luck
"Will the response be a boom in housing? McKellar asks. Unfortunately, no.” Too many obstacles, mostly regulatory and fiscal lie in the way. “Every time you buy a new piece of land (for a development), you confront the ‘not-in-my-backyard’ syndrome. It takes five to seven years to obtain permits. I call it socialism for the rich, the systematic attempt to keep densification out of one’s neighbourhood.”
There are tax obstacles, also. For a multi-residential project, “when a developer builds, McKellar adds, he has to pay both taxes on the finished value, but not if he builds a condo.”
In a recent report, Mike P. Moffatt, Senior director, Policy and Innovation, at the Smart Prosperity Institute, points to the failure of population forecasts to properly estimate population growth since 2016, especially immigration and international students. “In just five years, Ontario's population of adults grew by several hundred thousand more than forecasted, each of whom needs a place to call home. Despite the population growing more rapidly than forecasted, the housing stock in 2021 in most of the Greater Toronto Area and Hamilton communities fell short of the forecasts made in 2012.”
New Homes Need Guarantees
Another significant deficiency handicaps new housing construction: the absence of any guaranty on any new house to be built, of the kind you find in France, for example. In France, there is a legal obligation for home builders to give a three-tier warranty to their clients: one guarantees completion, another, the basic structures like foundations and roofing for 10 years, a last one, all secondary structures and materials, like windows and plumbing, for two years.
“This gives confidence to new buyers to enter contracts and facilitates processes throughout the building industry,” points out Alain Barth, a promoter and builder who has worked for many years in France.
As a result of these trends and constraints, new housing developments are falling increasingly behind. Compared to other advanced countries, a Scotiabank study calculates that Canada is short about 1.8 million dwellings. “We’ve taken so much housing out because of zoning, McKellar says, if we don’t find ways to use the existing stock of houses, we will not find solutions.”
