High home prices result in lost innovation, consumer spending and investment
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Canadians have long been proud of having a resilient housing market.
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After the global financial crisis, the Canadian market experienced a modest correction and then shrugged it off. This was viewed positively politically as home prices were a very public barometer of how a country was doing, and that measurement approach became cemented in the minds of a generation. As home prices climbed higher it also became a source of wealth for many. With approximately two-thirds of Canadians owning a home, according to Statistics Canada, that provides a popular majority of people that like to see homes increasing in value.
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Until recently, those struggling with a very real cost-of-living crisis in Canada were not viewed as a louder camp, with significant housing affordability policies only being added in recent years. Homeownership being unattainable for many should not make any Canadian proud. The worst part is that Canadian home prices are at the point where they also constrain general economic growth, making upwards mobility even more difficult. This makes the urgency to solve the high cost of housing more pressing. The Organization for Economic Co-operation and Development (OECD) predicts that Canada will be the worst-performing advanced economy over the next decade. Let’s look at the different ways extreme home prices are constraining growth and innovation.
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There are lots of innovators working hard in Canada, but the bottom line is that the country does not rank in the top 10 in the Global Innovation Index and the Conference Board has the country in the bottom half of its peers. High home prices make entrepreneurship, and taking risks in general, very difficult. When home prices are high, people are less likely to move to new areas for job opportunities, reducing growth. High mortgage rates also mean owners are less willing to sell and there are fewer options in the markets for people looking to move. This is currently happening in Canada, with very few homes for sale. This means that people cannot relocate to take advantage of better job opportunities, even if it would mean a higher salary. If paying your mortgage is your primary concern, you are also unlikely to take risks by joining or starting a new business.
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High home prices, and mortgage service levels, also result in reduced consumer spending and investment. High home prices lead to increased debt, as people take out larger mortgages to afford homes, making it more difficult for individuals to save money, invest in businesses, or otherwise contribute to economic growth. In the a recent Angus Reid survey, more than half of Canadians said they couldn’t keep up with the cost of living.
Canadians devote more income to servicing debt than other major peers. This should come as no surprise when factoring in Canada’s high tax rates and record debt burdens. The question is where does the government expect investment in new business to come from as dollars go to servicing the existing debt burden, which is there because Canadians need a place to live. It’s difficult to blame people for wanting a backyard for their kids.
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Over the past decade, Canadians were largely cautious about purchasing homes. The only time Canadians were given the all-clear to buy homes was just recently when Bank of Canada governor Tiff Macklem assured Canadian households and businesses that borrowing rates will remain at historic lows. The exact quote was as follows: “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.” This ironically preceded one of the fastest increases in rates on record and those that followed this advice now have much higher debt servicing costs. It’s tough to blame Macklem, as Canada must keep up with U.S. rate increases to avoid importing inflation. This was an impossible position for the Bank of Canada. But it’s hard to blame the average Canadian who thought they finally had the all-clear to purchase a home. Now they must try to manage the results of that decision.
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Those Canadians are now servicing a debt level that makes no sense and is only increasing, as the amortization terms of mortgages are being extended by many banks. This is an issue for another larger article, unfortunately, but it will compound the problems above. These individuals do not have the time, capital, or risk appetite to innovate to the extent we see in other countries. There is a very real risk that Canada continues to stagnate, with home values, previously celebrated, being a key cause.
Mark Le Dain is vice-president at Neo Financial Technologies Inc., a technology investor and adviser, and a published author.
Mark Le Dain: Canadian home prices, once cheered, are now dragging on economic growth - Financial Post
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