Executive Summary: The Canadian Housing Market

The Canadian Housing Market

ISU Essay

Markets are what drive the global economy skyward; as they create an environment for wants and needs. To define the word market by relating it to economics, simply it means “the demand for a particular commodity or service.” (Oxford Dictionaries, 2010) Now, being able to fulfil ones wants and needs stems from the idea of creating a market equilibrium of supply and demand in a certain economy. More specifically on a micro-economic level, this constantly changing equilibrium can be shown with the Canadian housing market. Canada is a leader in world economic growth, ranking 2nd in the entire world (Encyclopedia Americana, 2010). That being
said, a necessity like housing affects its market dramatically. As a result, one may see this from Canada’s recent economic meltdown due to an unsustainable amount of debt accumulated. However, the Canadian housing market is forecasted to proceed in the right economic direction because it is currently starting to normalize prices, thus giving a more manageable time for the average Canadian whose living standards are increasing; combined with sound government policies to deflect the blow of a bursting housing bubble.

In today’s standards, the pricing for real estate and housing is way above what the average Canadian may call a ‘reasonable price’. We are supposed to be a welcoming country globally, but how can Canada still be considered inviting when the cost to live is so high? In housing economics, this abnormal swelling of housing pricing is known as a housing bubble. More closely, a housing bubble refers to a time when housing prices increase more rapidly than inflation, household incomes, and economic growth. To further understand the typical pattern of a housing bubble, refer to Appendix A. There is some debate that Canada is currently at point B, which is at the peak of an economic housing bubble (Macdonald, Canadian Centre for Policy Alternatives, 2010). For instance, Canadian a high majority of Canadian homeowners are struggling to keep up with the costs for housing. The OECD (Organization for Economic Cooperation and Development) states that “Canada has the highest consumer debt to financial asset ratio among 10 OECD countries, even including the U.S.” (Macdonald, Canadian Centre for Policy Alternatives, 2010). This means that when comparing all the owned financial resources to how much debt one has accumulated, is obviously way too high. However, having said that Canadians deem housing to be a necessity, so they prioritize accordingly. Ian Lee, a former employee of the Bank of Montreal, “Saw time and time again that financially strapped Canadians would miss car and credit card payments before skipping out on the mortgage.”(Borzykowski, Moneyville. 2010). Much like food and water, shelter is another necessity of life that a person must not be without. In addition to high prices of homes, the talk of high mortgage payments goes hand in hand. The typical mortgage rate has evolved substantially from the past, from being more money down and shorter amortization periods. Now, more frequently banks will see homeowners approaching them to inquire about doing just the opposite. They are typically asking for smaller down payment amounts and longer amortization periods that last more than 40 years. To put a number to this, “375 000 mortgage holders in Canada are challenged by payments.” (Macdonald, Canadian Centre for Policy Alternatives, 2010) These people can’t handle any increase in interest rates on their payments. A safe idea would be for new home owners who are establishing mortgage rates, to choose the low risk path and go with a fixed rate mortgage. This would protect homeowners from their rates increasing in the future. Finally, when analyzing fluctuations in the economy, like interest rates, buying a house at the right time can have a greater affect on one’s financial situation. For example, referring back to Appendix A, if a buyer were to buy a home at point A and hold ownership of that house until Point C, there will still be an economic profit made from the inflation. Nevertheless, if a buyer were to buy a home at Point B and then end up at Point C, that buyer would suffer a large loss of initial investment. This will happen to the small portion of Canadian buyers or new families, as the market bubble finally bursts. When entering a market, the best thing to do is look at the trends of the right time to buy. Housing in this market is still not where it should be because the prices are still way over valued. Canada should take cautious movements with the decisions they make as it progresses forward in the future.

The Canadian housing market is currently rebounding from a recent spike in pricing, where prices are finally starting to moderately decrease. This is the new level, where the rate of housing prices does not surpass that of the rate of economic growth or the related CPI (Consumer Price Index). However, major changes aren’t seen. The chief economist of the Canadian Real Estate Association Gregory Klump had analyzed recent sales in comparison to previous trends. He concluded that “Canada is sitting about halfway between highs and lows from the numbers between 2008 and 2009” (Freeman, 2010). Finally Canada had showed some progress towards a normalized price. Recently, as Pascal Gauthier, a senior economist at TD Economics said, “October’s [2010] figures were indicative of a soft landing in the housing market”. (Freeman, 2010) So, for starters the way this “soft landing” works, is for the government and organizations like NHPI (New Housing Price Index.) give consumers a gradual change in cost so that they know the correct direction the market is actually going. Therefore, one might make the right economic decision, to sell when the market is high, and buy when the market is low. Sales have declined almost 30 per cent from a peak in the final quarter of 2009 (Freeman, 2010). Now, in recent months, The New Housing Price Index rose only 0.1% in October after a 0.2% gain in September (Statistics Canada 2010). This is the argument that one can see, as declining sales is a sure way to slow down the flow of the market through demand. For this reason, Canada is currently trying to work towards a market equilibrium and balanced market condition for themselves. It is expected that balanced market conditions will “dampen upward pressure on housing prices” (Gavin, CMHC, 2010), so they remain low for the time being. Having an economy whereby pricing and quantity supplied is more controllable, giving a more suitable pricing for all, rather than extreme pricing in a sellers’ market only. Furthermore, for some it is obvious that Canada is following the ideal path to proper housing prices. Douglas Porter, deputy chief economist at the Bank of Montreal, was one to say, “The market is finally approaching something closer ‘to normalcy’ after wild swings in prices and activity over the past three years.” (Freeman, 2010). Naturally, when referring to being able to reach normal pricing, what is meant by this new price for houses is for pricing to agree with both buyers and sellers from previous amounts. An example of a decrease in pricing is shown with the average housing starts. Housing starts are the number of privately owned new homes on which construction has been started in a given period. In the final quarter of 2010, the average Canadian housing cost was $333 315; contrasted to the previous housing cost in 2009 which was somewhere around $341 614. (Housing Market Outlook, 2010) . Housing prices are finally coming down again from their increasing peak in previous years. To reiterate what was said earlier, sellers are now conforming to the decreased demand of housing, by reducing prices. In conclusion, as Canada continues the downward trend in housing prices back to the normal average, this means well for Canada’s future economic development.

Canada is a growing country that is made up by a whole mosaic of different ethnicity’s and classes. To focus more on the separate classes of people that make up each community, this consists of the wealthy, middle class, and the poor. As the average living standard rises, the people at the bottom get left behind. The lower class suffers from the higher class driving up and inflating the price of house through competition, because that is what they’re willing and able to pay. By taking a look at Appendix B, it has shown the constant increase in the CPI over a certain period. The CPI is “a measure of price changes for a typical basket of consumer products” (Lovewell, M. A., & Lorimer, B., 1995, pg. 308). Even though there is somewhat of a constant increase shown in the graph, this does not mean everyone is moving uniformly up together. The first negative impact an increasing CPI does for the lower class is that it creates larger gaps between them and the upper class. Due to inflation and growth, more money equates to more opportunity for inflation and investment to work positively for them. Therefore, the top of the spectrum is rising much faster and leaving the poor and middle class behind as they are the ones suffering from the wealthy overbidding on homes, and overvaluing housing. Consequently, as CPI increases, the Gross Domestic Product (GDP) also increases. The GDP in Canada is shown by Appendix C. Basically, to better understand what GDP is, by definition The total dollar value at current prices of all final goods and services produced in a country over a given period” (Lovewell, M. A., & Lorimer, B., 1995, pg. 282). It is assumed that because there is more productivity per capita, this equals less unemployment. In the end, a higher GDP means more money put back in people’s pockets, and finally there will be a shift from rental housing to bought homes. By increasing the demand, this eventually increases the price due to the Law of Supply and Demand. See Appendix E for explanation; as supply increase to S1 the equilibrium point sets a new price at P1. If however, more housing is built in Canada to up the supply, then this will drive costs back down. A potential buyer must hope for exactly this to happen, to therefore keep the market equilibrium price at a low level. Lastly, Canada has definitely developed a reputation for easy employment opportunities towards net migration in the global economy. “In 2010, net immigration is forecast to increase to 274 365, while 2011 will see an increase to 289 759” This growth in lower class will increase demand for low cost housing, particularly renting. Thus, the desire to become a Canadian citizen is growing because of our increase luxuriant lifestyles. Overall, even though a high productivity rate and average income result in an increase in Canada’s living standard, this creates unwanted bidding competition against the stagnant living styles of the lower class; who in effect will suffer.

Canada’s economy is viewed as one of the most financially sound economies in the world. To look at some of the positive effects of an increasing living standard, “Most Canadians enjoy a higher quality of goods and services that are available to individuals and to society.” (Financial Security, Government of Canada, 2008 ) Not only do most Canadians ‘feel’ better on a day to day basis, but they also have better financial security. To start off, Canada’s home ownership rate is the highest it has ever been. Currently, Canada’s home ownership rate is remaining somewhere around 70% (Rabidoux, Financial Insights, 2010), which is one of the highest in the world. On the contrary, the U.S. was able to reach a percentage of 70% at one point, but failed to maintain it because of the subprime mortgages and accumulated debt. This was only possible for Canada, because mainly of low interest rates, rising disposable income, and strong job growth. It is also projected by Marc Mongrain of BMO Financial Group that Canada will continue the trend of increased homeownership, especially now with housing prices coming down. He says, “Housing activity remains strong right across Canada…. consumer demand remains brisk for housing product, and we expect this trend to continue for the foreseeable future." (Adair, Realty Times, 2005). Adding on to increased ownership, Canadians have a bright future as their affordability will be increasing as well. Seen in Appendix E, the progress of Canada’s affordability, which compares annual incomes to housing costs. As the cost of living has started and will continue to reduce, incomes will have the time to catch up and close the gap between Canadian income and debt. The main factor that might shoot up pricing again however might be the increased demand for housing, as it continues to become more affordable. One might hope that Canadians will learn and wait until buying a house is completely affordable and thought over vigorously. Finally, to link living standard to GDP once again, it is shown in Appendix C that Canadians’ well being is proportional to their increase in productivity. Here are numbers to show their increase over a large period of time, “The overall increase between 1982 and 2008, inclusively, was $14,611, or about 59% - an average of 2.26% per year.” (Human Resources and skills Development Canada, 2008) As of recent times, this number has now been increased to “2.5% raise in GDP from 2009 to 2010” (Afleck, Economy Watch, 2010). Seen in Appendix D, affordability is always changing and currently Canada is on the upswing. With the increased GDP and increased affordability, a proposal of increased interest rates, to a manageable rate of course, should be put in place after the economy is no longer recovering. This would allow existing homeowners to maintain values of their investment into their homes, and stop an increase in demand for homes to reach any undesirable level. Generally, Canadian living standards are projected to increase because of what is known about the relationship between GDP and Canadian living standard; thus making housing and real estate more affordable for the average consumer.

The Government of Canada is elected democratically, as a way for the majority of the country to vote on whom they believe will serve the people the best. Although, more frequently do people disagree with the policies enforced or decisions made on taxes. It may not be apparent at first, but the numerous inconveniences that may affect the average person in a situation like this, is normally a short run problem. These short run situations are a result of the government putting fourth a decision made from the top, and people’s living lifestyles are the ones to suffer because they are not in their best interest. Initially, a perfect example of this can be seen with the massive amounts of public housing that has been taken away in the past. Starting in 1979 to 1984, social housing programs underwent an extensive review. Due to the harsh economic times back then, “Housing funds were reduced and directly targeted to low-income people… In 1996 the federal government announce that the management and ongoing subsidies of existing social housing would be transferred.” (The Canadian Encyclopedia, 2010). The demographic of these houses consisted mostly of poor, senior, or people who were ill and can not afford any alternative. Reducing the supply of low-cost housing increased the “number of homeless people from 300 to 1100 during the early 2000s” (The Canadian Encyclopedia, 2010) The negative impact this had on the small portion of people across the country, was the result of the government trying to save money. Meanwhile people must have lost lives trying to survive. Not only was this selfish, but in addition Canada had decide to increase interest rates, and put fourth new mortgage regulations in April 2010 (Freeman, 2010). What this did for Canadians, was that ii pushed and pressured buyers to pay for a home at an amount they would not normally pay for. The urgency to buy a home went up, meanwhile the homeowners and sellers were the ones making the profit from the overvalued prices. Lastly, homeowners who use their houses for rental property are the people who will suffer because of government policy. Due to rent control, and the power the government has to monitor rental pricing, the owners are the ones suffering. Less money is given towards the landlord, and in effect might make it impossible for owners to keep up with building maintenance and operating costs. Some places may get devalued because of no money to pay debts. “[Landlords] must fill out an appeal if they want an increasing rent and get to approved at a provincial level.” (Cruz, 2009). As a result of the government going forward with some policies, there is still other groups who are affected negatively and consequently the government should gain perspective from the people to understand the loss they are accepting.

Apart from the Canadian government being set up as a mixed economy, to allow the government to intervene when they feel they need to.
This is one of the reasons why Canada’s economy is so safe. There is strong involvement to allow no Canadian to fall too far behind. The economic decisions made by the government reflect Canada’s long term economic plan, because it is always in the best interest of the people. For starters, there is a high proportion of Canadian mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), to give buyers the assurance their country is supporting them. A great contrast can be seen in the United States, where plenty are suffering huge losses because of poor government policy. This consists of unchecked credit history, and no help with payments. One of the major reasons why Canada will be the first to get through this economic trough or recession is because the government supports Canadians so much more. As well as being insured by the government, they also give assistance in terms of grants and loans to developers or consumers. This program is known as Affordability and Choice Today (ACT), which is sponsored by the federation of Canadian municipalities. This goal was to “promote innovations in housing, planning, design and construction technology.”(The Canadian Encyclopedia, 2010) In effect, this is will boost the quantity of housing to meet demands of consumers and create a new standard of living. More money invested in Canada equals a brighter economic future. This corporation is very significant and invaluable to Canada’s future, with the amount of companies allocating their money not into the production of housing, but elsewhere. The reason being is that the cost to build housing has gotten too high. “In Toronto, builders are not willing or are not able to keep up. The new house completion trend in Toronto is actually on a decline” (Canada Mortgage and Housing Corporation, 2010). So, with the price becoming more
affordable, more housing completions will be the result. Last but not least, the legislation of rent control can be a very good thing for people, rather than what was stated previously. Rent control is place in effect, to protect residents from the landlords raising rents too high in the market. With rental properties taking up 30% of all real estate in Canada (The Canadian Encyclopedia, 2010), this is a large portion of the market that can have influence on other costs to live as well. Rent control is better for the consumer so that the cost of living does not exceed incomes. Land owners are allowed to raise prices in Canada depending on the provinces CPI (Consumer Price Index), which is something that is released monthly. (Cruz, Global property Guide, 2009). This is a good indication of inflation because a trend can be extrapolated from these increases month to month. As a result, rental residences have more security when it comes to how much they will be paying for rent. In conclusion, Canadian homeowners are supported positively by the Canadian federal government through policies that are enforced to reduce costs, promote quantity, and improve quality of housing.

The Canadian housing market is predicted to head in the right economic direction because of the price of housing that is coming back down to par, in effect this will give a respectable opportunity for the average Canadian, which is accomplished by legislated government policies positively affecting a softer impact of a potential housing bubble. The housing market in Canada plays the same role as any other fluctuating market. Housing acts as a necessity and it’s demand and supply are affected by certain factors, which set equilibrium prices. Anyone is able to predetermine the direction and pattern from recent examples of prices as they rise and fall; one just must think rationally like an economist and make the right decision, whether it’s a buyers’ or sellers’ market at the time. The way Canada functions is uniquely sustainable and Canadians should be grateful that they live in such an economically safe country.

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Supply and Demand Curve

Bibliography

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