Stimulating residential construction and sales activity might fuel a vicious cycle that could eventually derail the national housing market, according to the head of the Canada Mortgage and Housing Corporation.
The problem, as Evan Siddall described it in a recent contribution to The Globe and Mail, leads to the same element feeding into consistently elevated housing prices: unchecked speculation and investment activity.
“Economic growth and immigration strongly influence demand for housing. When they exist together with slow housing supply, the problem compounds even further. Opportunistic investors – both domestic and foreign – seize an investment opportunity and prices climb higher still,” the CMHC president and CEO wrote.
“Making home-buying easier, by easing mortgage eligibility requirements for example, can increase demand; but unless supply keeps up, prices rise even higher,” Siddall added. “Counterintuitively, if we focus housing programs only on helping people buy homes, we make it harder for people to afford places to live. If more people can afford to spend more to buy houses, prices increase. And higher-priced housing leads to higher rents.”
This is particularly problematic, as housing currently represents a disproportionate share of the Canadian economy, at 7.5%. The ratio is far above that seen in other global economies like the United States (4.9%), the United Kingdom (4.1%), and Australia (5.9%).
“Simply put, building more single-family homes is not the foundation upon which our economic prosperity will be built,” Siddall explained. “If we aren’t careful, housing will eventually eat our economic future from within.”
“Canadians spend 50% on real estate transaction costs (broker fees, land-transfer taxes and legal costs) than we do on research and development. In comparison, our American friends spend 25% more on research and development than they do on real estate transactions.”