Canada’s Addiction To Rising Home Prices

To tackle our housing affordability issues we need to reduce our dependence on real estate as a primary driver of wealth creation and economic growth

Canadians love talking about real estate. Every conversation seems to end up in the same place: Did you see how much that house sold for?!?

It’s not that surprising we’re obsessed with real estate when you consider that it’s made many everyday people into millionaires. Homeowners who entered the housing market before prices went sky-high have gained incredible amounts of equity. It’s as if large swaths of entire generations won the lottery. As the below ad puts it, “When your house is rich, you are too”.

Equitable Bank commercial for reverse mortgages, that “unlock equity and make [older homeowners] rich”

As a society, we’ve become addicted to these wealth windfalls. The unbelievable growth of property values has convinced us that real estate is the best place to invest our money, resulting in a self-fulfilling prophecy where investor demand helps to push prices ever higher.

All of this housing wealth gained by older generations comes at the expense of younger and newer Canadians, who are being crushed by the massive mortgages they must take on just to have a place to call home. And that’s only if they’re fortunate enough to ever save up a downpayment, which takes far longer than it used to. Purchasing a home has gone from being a right of passage to an enormous burden, putting at risk the “promise of Canada” – that every generation will have a better life than the one that preceded it. 

To get back on the right track, we need to break our addiction to rising home prices.

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Generation Squeeze founder on CTV and in the Globe and Mail

Last month, Paul wrote a piece titled “Trudeau Takes First Step To Break Canada’s Addiction To Rising Home Prices” for the Globe and Mail (full article here). In the article, he described how the way we measure economic growth has discouraged politicians from enacting policies to curb the rise in home prices.

We expect our leaders to produce strong economic growth, and measure their success using GDP. Letting real estate prices rise is an easy way to drive up GDP – so that’s what our leaders have done. Decades of this overreliance on real estate to grow our economy has resulted in an unhealthy dependence, which is why real estate is now the biggest sector in our economy, yet contributes very little to employment.

Paul thinks that it’s not only politicians who need to break their addiction to rising home values – homeowners need to do the same:

“It has become the expectation (dare I say, hope?) that the value of our principal residences will rise, because their increasing value offers a relatively easy path to financial security and retirement savings.

Since 1977, Canadian homeowners have gained trillions in housing wealth – most of it sheltered from taxation. In the light of such windfalls, it’s not surprising that many of us have come to bank on our home as an investment that will simply keep rising in value.

This expectation has caused us to blur the distinction between building our wealth by paying off a large mortgage versus hoping the value of our residence will grow exponentially.

The former is a strategy to gain equity through hard work and sacrifice over 25-plus years by paying off a large debt. The latter is the over-commodification of housing by which purchasers search for wealth windfalls from housing, which comes at the expense of preserving affordable homes for those who follow.”

The bigger the wealth windfalls accrued by one generation of homeowners, the larger the mortgages of the next. As Paul described on CTV, as if those wealth windfalls were not enough, many homeowners use this wealth to buy investment properties that they rent out to younger people. The homeowners gain equity as the younger renters pay the mortgage.

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Green Party leader agrees with GenSqueeze

While discussing Bill C56 (the “Affordable Housing and Groceries Act”) in parliament, Green Party leader (and GenSqueeze supporter) Elizabeth May made some comments that we were so happy to hear.

“[Addressing competition in the grocery sector] doesn't really get at our immediate problem, neither does getting rid of the GST on building rental housing. We need to make some rather larger structural changes, like not having our GDP growth depend so much on rising home prices. Breaking our cultural addiction to rising residential home prices would make a big difference.”

We commend Elizabeth May for recognizing that we are in need of larger structural changes; there is no silver bullet solution. It’s important to acknowledge the bravery it took for her to make such a statement. Until recently, it was unthinkable that a Canadian politician would ever raise the idea of curtailing home price growth. This article from last month, for example, details all of the reasons why “politicians don’t really want home prices to fall”.

As Ron Butler, a mortgage broker, put it:

“No politician alive wants to be associated with the concept that a voter would buy a home and the politician would want it to be worth less than what the voter paid for it. That would be political suicide.” Canadians love real estate because “they love the wealth, mainly tax-free, it has created for the last 20 years”.

But things are changing quickly. Recent polling data suggests that the vast majority of Canadians don’t want to see home prices rise further. With both voters and party leaders on the same page, it seems there might be hope for restoring affordable housing.

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Reader comment of the week

You may have noticed that we’ve been more active here on Substack recently. We’re hoping this platform can help us build a community of Canadians passionate about generational fairness. We’ve been enjoying the lively discussion so far – and the many great insights from Gen Squeeze supporters and skeptics alike. Please keep them coming!

One of our favorite comments so far comes from

Mary

, on our post about how building more homes, alone, will not solve our housing affordability issues.

“When I was younger I wouldn’t have dreamed of owning another house - a 3 season cottage maybe but another single family home never crossed my mind. But I work with many younger people (30-45yrs age group) and I’m shocked by the number of them who own ‘investment’ properties. These folks are not real estate agents or contractors who flip homes, they’re nurses, technicians and receptionists etc. They have leveraged their own house to purchase another house (sometimes more) and rent it out or Airbnb it. This is a cultural shift - the idea that building wealth could be in the real estate sector rather than diligent saving and investing in stocks and bonds.”

Mary has astutely observed the emergence of our addiction to rising home prices. While it might now seem normal to own multiple properties (oftentimes taking on huge amounts of debt to do so), there was a time when this would have been unimaginable. As Mary explained, in the past, rather than overleveraging themselves to buy investment properties, people would save and invest in traditional assets like stocks and bonds. There has been a significant shift in our collective mindset. The result: investors (mostly over the age of 55) outbidding people looking to buy a home to live in at a growing rate. The chart below illustrates that investors purchase a growing share of homes (29.9% in 2023, up from 19.65% in 2014), while first-time homebuyers purchase fewer (42.57% of homes, down from 50.36% in 2014).

Calculations by Generation Squeeze, data from The Bank of Canada

To restore affordability, we need to prioritize housing as a place to call home, rather than as an investment. The resultant decreases in investor demand will help to bring down prices.

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That’s all for this time, thanks for reading.

We’d love to hear what you think about all of this. See you in the comments section.