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Home Publications Blogs Beat the Press Washington Post Touts Unaffordable Housing In Canada

Washington Post Touts Unaffordable Housing In Canada

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Wednesday, 23 June 2010 16:25

Most people involved in discussions of housing policy think its good when housing becomes more affordable. The Washington Post apparently believes that it is good when housing becomes less affordable. At least that is what readers of an article discussing Canada's housing market would have to assume.

The piece touts the fact that, in contrast to the United States, the Canadian market has "already has rebounded beyond pre-crisis levels." According to the Teranet-National Bank House Price Index, nominal house prices in Canada have almost doubled over the last decade. Since overall inflation has been roughly 30 percent over this period, this means that housing has now risen by more than 50 percent relative to the other prices and more than 40 percent relative to wages. As a result, it is far more difficult for Canadians who do not own homes to buy them today than was true a decade ago.

It is not clear why anyone would view this as a desirable outcome. It involves a massive transfer from the young people who do not own homes to those who already do.

It is also not clear that this situation is sustainable. It is likely that current house prices are supported in part by an expectation of future price increases. If prices continue to increase in excess of inflation, then housing will get even more unaffordable. The result is likely to be at some point that there is a glut of supply and inadequate demand leading to house price declines. The experience of declining house prices will reverse the expectation that house prices will continue to rise, thereby leading a much greater fall in demand and further declines in prices. The end result is likely to be much lower house prices and a painful process of adjustment for Canada.

It is striking that the Post either views this situation as good or somehow cannot recognize the problem of a housing bubble even after the collapse of one just devastated the U.S. economy.

 

Comments (5)Add Comment
...
written by izzatzo, June 23, 2010 7:38
It is not clear why anyone would view this as a desirable outcome. It involves a massive transfer from the young people who do not own homes to those who already do.


The IMF has decided to respond to the US for financial aid and permission to default on its staggering debt, permitted under the following austerity program:

Given the massive intergenerational transfer of wealth in the US from the old to the young per the busted housing bubble, and given the ongoing massive intergenerational transfer of wealth in Canada in the opposite direction from the young to the old, the entire population in each nation is directed to trade places with each other per respective housing arrangements to correct the corresponding wealth surplus and deficit.

Since Social Security and Medicare will no longer be necessary after this correction given the added net wealth and single payer health care, the US will bounce back in no time from the deep recession with enough output to reimburse the newly nationalized Canadians for their losses in a win-win outcome.
Banking rules could discourage speculation
written by Drew Kime, June 23, 2010 9:13
One of my online friends lives in Sweden. He has said that their banking laws set criteria for how much can be loaned on a house based on fixed factors: square footage, number of rooms, year built, lot size, etc. You are free to pay whatever you want, but banks may only loan up to the calculated amount.

So if the formula says a house is worth $100k, but because it's in a nice neighborhood the average price of comparables is $150k, you have to have at least $50k down.

This means you can't borrow against the equity in your house unless there is genuine, not speculative, equity. And if you're going to trade in real estate as a business, you have to use your own money to do it, not the investors' -- who will of course beg the government to bail them out if the investment tanks.
...
written by John Charlton, June 24, 2010 11:11
In addition, the "facts" of the story are egregiously wrong. The real story about what is going on in the Canadian housing market can be read here.
http://www.greaterfool.ca/
The true test is yet to come...
written by Anthony, June 24, 2010 11:36
Canada's "remarkable" economic recovery is also connected to its housing bubble. Unlike most recessions, this latest one was tempered by ordinary Canadians taking on massive amounts of debt, mostly in the form of mortgage debt, with spending and investment by private corporations at a standstill. Canada's national bank has chided the manufacturing sector et al for not doing more, but they were content to sit back while everyday Canadians took up the slack in spending and supported the economy during a tough period.

The problem, as Dean points out, is that as housing prices begin to catch up with reality and decline--even if only very little--consumers' ability, and willingness, to spend will be greatly restricted, revealing the weakness of Canada's recovery.
Canadian housing
written by R West, June 24, 2010 12:04
Keep in mind that we have less than 10 Canadian lending institutions that probably account for 95% of all mortgage lending. The Canadian Mortgage and Housing Corporation a 'government enterprise' allowed these lenders to unload approx $50 - 70 billion of dodgy mortgages during 2008/2009. Sweet deal huh? The CMHC and the taxpayers now own them. It is the beauty contest management model - get rid of the ugly ones!

The largess of CMHC is to the detriment of any 'cash' buyers who are constantly having to chase a market that is
drugged by 0 - 5% down payments. There is no reward for having 100% equity because with ultra low down payments there is no distress selling.

A commentator, Mark McQueen of Wellington Financial summarized the situation adeptly in his blog.
http://tinyurl.com/37qxm4m

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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