The guy who runs Generation Squeeze says building more homes isn’t enough to lower prices, because most people buying houses are already property owners. Property owners can either sell their current house to get a load of cash, or borrow against it to get a load of cash. Either way, they can pay a lot for their next property.
As evidence, he mentions that Alberta has less supply per capita than the rest of the country, but house prices are half those of Ontario and BC.
Here are the good bits:
While building more supply is absolutely important, setting ambitious targets does little good if property values continue to rise. Unless they are deeply subsidized by tax dollars, new market units will price in today’s high land values – which have soared well beyond what most can afford with local earnings whether the new homes are intended for renters or owners.
Plus all the focus on “Build! Build! Build” ignores that lack of supply isn’t the only, or even primary, factor influencing the price of rent and ownership. You could be forgiven for thinking otherwise, since undersupply has become the dominant narrative shared by Canada Mortgage and Housing Corp. and a variety of financial institutions.
The Bank of Nova Scotia, for instance, published reports lamenting that Canada has a smaller number of private dwellings per capita than the G7 average, blaming this ranking for much of our unaffordability problem. This leap in logic begs questions, since the same Scotiabank data also show that Alberta has lower levels of housing supply per capita than most other provinces, yet home prices in Alberta are about half as expensive as those in Ontario and B.C.
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Mr. Pomeroy [who published a study about this stuff] encourages us all to widen our focus to include the vicious cycle by which rising home prices drive rising home prices.
First-time homebuyers are a minority of purchasers. They compete with many Canadian buyers who have already owned in the market. Bolstered by the equity they’ve gained from surging home values, existing homeowners bid up the price of housing to levels that are disconnected from earnings paid by local jobs. This was especially true prior to recent interest-rate hikes, because historically low interest rates made it cheap for homeowners to liquefy wealth windfalls created by skyrocketing home values.
Some homeowners bid up the price of housing simply to relocate. Others do so to purchase an investment property in search of additional wealth windfalls.
The latter are among the one in six Canadian homeowners who own multiple properties. Most are over the age of 55. To pay the mortgages on their investment properties, they increasingly collect rent from younger residents with dashed dreams that a good home should be in reach for what hard work can earn.
This reveals that the vicious cycle by which those enriched by high home values bid housing costs ever higher isn’t just ruining the market for aspiring owners. It is also breaking the rental market, as confirmed by the record-high rents reported this summer.
To disrupt this vicious cycle, political leaders must help break Canada’s cultural addiction to rising home prices by endorsing the plan that governments will use all available policy tools to stall home prices for the foreseeable future.
Every article like this never had a coherent explanation why rents are so expensive.
Like yeah, people hoard investment properties. I get that. But investment properties get rented.
People don’t pay rent as an investment.
Investment properties get rented out. So the laws of supply and demand function much more directly here: if rental prices are going up, that means there are people willing to pay those prices to live there and they can’t find anything cheaper. That means there’s demand vastly outstripping supply.
I’ll believe we don’t have a housing shortage and the problem really is just speculators watching their assets grow if the price to buy is skyrocketing but the price to rent is low.
Otherwise: no, the landlords and gougers are able to exploit people because there isn’t enough to go around.
People don’t hoard food, and when they do it’s not really a problem, because there isn’t a food shortage.
Nobody scalps tickets to my kid’s violin recital because there were more seats than the crowd will ever fill.
Compare vs TP in 2020. And the chip shortage. And the baby formula shortage. I think the last few years have given us all a loud demonstration of how shortages impact pricing.
If you have a game of musical-chairs-for-cash and you have 4 chairs and 6 players, the price of the chairs will be defined by whatever the 5th player can’t afford.
Add more chairs.
Well said. I’ve made this point in other places and haven’t had a satisfying explanation in response yet.
The argument that speculators and investors will just gobble up any new builds, and rent them out for profit, seems to ignore that principles of supply and demand apply to rental homes as well as purchased homes. There are surely enough independent landlords that any price-fixing scheme would be impossibly difficult, so if we had enough homes for everyone and landlords and investors owned an oversized amount, then that should be quickly corrected by the market when rental prices are lowered enough that some landlords decide to sell their investment properties.
Quickly is where you got it wrong.
Let’s face it, the housing market has already crashed. The average price is down 20% from the 2022 peak and continues to fall. Investors are trying to sell, but buyers aren’t having it. More people are renting now, driving up rents, as why would you want to buy at this time? The prices are still falling and are going to be a lot cheaper in a couple of years.
The bottom of the market will take time to find. Eventually investors will have to cut their losses and finally sell at a low price. But there is no big rush. They can sit on a property for a long time in hopes of getting a high price. This kind of thing does not happen quickly at all.
Again, we’re talking about rental units. Sale prices will not move quickly, but rentals would if there really was some massive glut of rentable units.
Only if there is some strong impetus for landlords to lower rents in the near term. History suggests that landlords will cling to high rents, even after the market isn’t there, in hopes that they’ll get it. They don’t necessarily have to fill the units.
Again, eventually they’ll have to cave and give in to the new reality, but more often than not they can remain irrational longer than you can remain solvent. There is no reason to think anything will happen quickly.
Yup. This is probably largely because under the existing system, property value is tied to how much money the property can make the owner. The horror of this is that from the landlord’s perspective, it’s better to leave units empty than to lower the rent, because if they do lower rents, their “investment” will go down because it would be solid proof of reduced “value.” Any time land is upzoned, it also multiplies the property’s potential value, which makes me concerned about new apartment construction (which I welcome, but preferably not just high cost luxury suites). It’s not just about supply.
Absolutely, housing was relatively cheap in Alberta for close to a decade because demand was low. Now that we’ve had a ton of people move here, guess what happened to housing prices (both to buy and rent)?
Dairy, poultry, and egg producers hoard food. They have a government-enabled system to ensure it. But you are right that it doesn’t turn into a shortage as it is done with the intent to raise prices, while a shortage occurs when price is unable to rise.