Sad, Young, Inquiring Minds Want To Know: “Could someone explain why Canadian housing prices have gone up so much in the last few decades? Why are houses not being built to meet the demand and keep the prices in line with inflation?”

From ‘As a young Canadian, the current real estate market makes me sad. What is your view?’ a thread at reddit.com started 24 Nov 2012. [hat-tip poster_with_many_handles]

“I was born and raised in Canada and as a young adult, I want to be able to start a family and buy farm property in Alberta, not too far from a major city. However, the current real estate market makes this dream rather hopeless unless I want to owe my life to a bank, if I can even qualify for the massive loan I would require. I am curious what other people’s view is on real estate in Canada?” – slowbreeze

“I live in Toronto and I’m probably never going to be able to afford a house if I also want kids.” – Mun-Mun

“Could someone explain why housing prices have gone up so much in the last few decades? Why are houses not being built to meet the demand and keep the prices in line with inflation?” – wugitor
[EXCELLENT questions. Watch how your college economics professor tries to squirm out from under those. Housing costs in Canada should rise at the rate of inflation (more specifically, wage inflation). Period. Speculative manias distort from that, but the effects will be temporary. -ed.]

“My dad and I have the same career (dentist). He bought his 4-bedroom, detached Toronto home in 1979 at the age of 26. This house is now worth in excess of $1,000,000. Imagine a 26 year old buying such a house now! I am 29, and despite having the same career I am unable to afford a home, let alone a detached house. The times they have changed.” – Ostracized

“I just bought a very nice recently renovated tri level split in my city in the nice part for 160k, granted I live in a small city of about 80 thousand, and it isn’t as exciting as Toronto or whatever, but I paid 20% down, and have very small mortgage payments, I make a decent living and have quite a bit of disposable income. I travel at least twice a year and generally buy things I need. I think it all depends on where you live. Live somewhere smaller and you can get a lot for your money.” – PartyMark

“Move to Windsor Ontario. Houses for $50-150k. (And more). I lived in Toronto, moved to Windsor because paying $250k for a condo, or $350-$550 for a starter home is absurd. I bought a 4 bedroom, 2 bath w/pool for $130k.
I would never move out west or to a big city… It is obvious that average Canadians can’t afford to pay off a $500k mortgage. They are just hoping to sell for a profit. Someone is going to be left holding that bag… And it isn’t going to be me.”
– Bortology

Bortology said: “It is obvious that average Canadians can’t afford to pay off a $500k mortgage. They are just hoping to sell for a profit. Someone is going to be left holding that bag… And it isn’t going to be me.”
Amen.
Sensible young chap.
– vreaa

37 responses to “Sad, Young, Inquiring Minds Want To Know: “Could someone explain why Canadian housing prices have gone up so much in the last few decades? Why are houses not being built to meet the demand and keep the prices in line with inflation?”

  1. Again, I’m going to state that society is so screwed up they “hope” that the cost of putting a roof over our head continually goes up! That’s like saying, I hope my food goes up and my gas too. Hopefully interest rates go up, oil, my ipad, computer and cell phone too. That’s how stupid society has become..

    • Dimitri Tishchenko

      Only the 70% want this.

    • at some point, we’ll get things that go up and stay up indefinitely … http://tinyurl.com/c4xwgtw

    • I call it The Great Distortion, cause that’s exactly what it is. Households and businesses have lost their sense and ways of measuring value to make fundamental financial decisions. Some even believe this is the new normal. This distortion is largely driven by obfuscated rates, employment, inflation and GDP statistics formulated by the government and central banks. It will be more evident then ever in 2013 as private statistics completely diverge from public statistics or what’s reported on the ground.

      When all is revealed, people will see the emperor has no clothes, and that’s when everything will break down again.

      • UBCghettodweller

        >Some even believe this is the new normal.

        Probably the greatest anxiety I have about my future as a 20-something is that this “new normal” is in fact true and not just a belief system centered around bubble economics. I Worry that Vancouver is just a decade or two advanced model of how unaffordable and how class divided North America will be come. If it is, even with a post-secondary education in a field that there is a high demand in I’m truly buggered.

      • The laws of economics and fundamental demand will always prevail, so this will not be the new normal. As for Vancouver, I can’t justify anything other then fraudulent lending as the main reason for excessive home prices relative to stagnating incomes and a five year negative savings rate. It is impossible for prices to have risen that high and that quickly any other way.

      • If you’re relying on a job to provide for your standard of living, you’re largely fucked. Education is a scam, like a chain letter. It’s all about wealth now, largely inherited. If the system corrects itself I’ll be amazed, and we’ll probably all be bankrupt – creditors and debtors alike. For that reason, I think we are in a post-capitalist world. But they’ll surely call it capitalism when they fuck you with it.

      • UBCghettodweller

        >If you’re relying on a job to provide for your standard of living, you’re largely fucked. Education is a scam, like a chain letter. It’s all about wealth now, largely inherited.

        I really have no other option other than to covertly produce pharmaceutical grade LSD or Meth on top of completing my PhD to supplement my income right now.

        I’ve also seen derivatives of cocaine that are many times more potent simply by adding a methyl group here and a hydroxyl group there.

        That can’t be any more shady and morally corrupt than being a realtor, right?

      • Ralph Cramdown

        Don’t let your ego lure you into the trap of thinking that current times are radically different from what’s preceded us. Through most of history, most people have lived hand to mouth and complained about high taxation, food prices, inflation and the high cost of borrowing money. And some people have always made the jump from hardscrabble to comfortable, though of only average intelligence and earning power, through thrift and moderately successful investment of their surplus.

        What’s different about today? Yeah, we’re in a housing bubble, so people are complaining about the high cost of housing instead of the high cost of borrowing money. Other than that? We’ve a generation of boomers retiring and, through luck and demographic effects, a greater fraction of them has saved a surplus than normal. Anything else?

      • …”I really have no other option other than to covertly produce pharmaceutical grade…”…

        [NoteToBordelloDweller: synthesizing the goodies is the easy part…]

      • [CBC] – Men shot dead in B.C. suspected of gang ties: Pair gunned down at hotel in Burnaby

        …”CBC News has learned Dhak, a south Asian, and a Caucasian man believed to be his associate were gunned down Monday at the Executive Hotel and Conference Centre at Lougheed Highway and Gilmore Avenue in Burnaby, B.C., just before noon. Dhak’s brother, Gurmit Dhak, was shot and killed outside the Metrotown mall in Burnaby in October 2010.”…

        http://tinyurl.com/bqhxm6b

      • …”the emperor has no clothes…”…

        And fewer visitors, too.

        [CBC] – B.C. tourism from U.S. down sharply

        …”Visits to B.C. by U.S. tourists are down by more than a third over the past several years, according to a report from a Vancouver research group. Nearly 2.5 million American tourists came to B.C. in 2011, but that’s 36-per-cent lower than the number that came 14 years earlier, according to the report from Urban Futures, a Vancouver research company.”…

        http://tinyurl.com/cm4eujo

      • UBCghettodweller -> “I really have no other option other than to covertly produce pharmaceutical grade LSD or Meth on top of completing my PhD to supplement my income right now.”

        Spoken in jest (at least in part) we all realize, but it is precisely this draw towards the ‘fast and loose’ buck that all the spec manias have produced. And it sticks in our craw.
        With all the serial asset bubbles, income isn’t enough anymore, one is strongly encouraged to take chances… use the stock tip, flip the condo, rush into the mortgage, (temptations towards nefarious activities).
        It’s bloody distracting, and very, very bad for our society.
        Instead of people being rewarded to work well, and within their skill sets, they’re encouraged to be cowboys in areas they know nothing about.
        Check out the reno attempt headlined today as an example.

      • UBCghettodweller

        For the record, my comments about clandestine synthetic methods are in jest. An Aloe product pyramid scheme seems a much safer bet.

        But it still stands, even people who are highly trained in fields that society tells us are valuable are drowning right now. We’re the stupid ones since we haven’t jumped on the speculative mania.

        For me specifically, I’d like to say that I think Douglas Coupland’s movie “Everything’s Gone Green” sums up my Vancouver experience so far. Written and filmed during the mid part of the insane upswing in housing prices, it’s probably more relevant today than it was five years ago.

    • Those other things you mentioned are meant to be used up relatively quickly – a house is meant to last for a very long time. And you can’t really resell oil, food, an ipad, or cellphone and hope to make a profit unless you are actually in the retailing business. As stupid as this house speculation game can get, one must recognize that real estate is in a different category to these other things.

  2. Why (seemingly) have housing prices gone up faster than both wage and price inflation:

    1) price inflation has been suppressed by globalization. Whereas many goods that we buy are produced by low cost labour overseas, houses can’t be built in China and transported here.

    2) The value of a house is largely a function of the value of the land it sits on. The value of land in the middle of Toronto is much higher than that in the middle of Saskatoon. This is because the value of land is a function of what is in its proximity. Now, in the last 50 years or so, most Canadian cities have become more populous and cover a larger surface area, which means that the premium for being centrally located within a metropolis has increased. This is why homes in midtown Toronto cost about 4-5 times more than similar ones in Milton.

    I’d bet that in most cities that have not grown much you will find the price of a house to be largely in lock step with wage inflation: if you want to buy a house in Thunder Bay, I’d guess that the price for that house is not much different than it was 40 years ago in relation to nominal wages.

    3) Due to lower interest rates and easier mortgage qualifying rules than existed in the past, house prices have risen because people can “afford” more. In a nutshell, people have all kinds of access to credit they didn’t have in the 60s and 70s (e.g. the popularization of credit cards in the late 70s/ early 80s). And I don’t think we can put this genie back in the bottle – people are addicted to credit and any serious attempt to reign it in will instantly thrust our economy into recession.

    • “price inflation has been suppressed by globalization”
      And before that, it was productivity increases, factory automation, the assembly line and the industrial revolution, in addition to a millenias long secular bear market in commodities (for many of the same reasons).

      “houses can’t be built in China and transported here.”
      I don’t see why not. But you end up with the same problem as refrigerators: You’re paying a lot to ship the empty air inside the product. Here’s an assembly line housing factory right here in Canada:

    • RD -> thanks for the considered comment.
      What about analysis showing that land prices in cities like Amsterdam and Boston have tracked inflation, for centuries?

      • This is possibly true, though Boston and Amsterdam are both very old cities compared to most Canadian ones.

        I suspect that urban sprawl has less effect on the house to wage ratio over time in those old cities than Vancouver and Toronto (which have grown at a faster pace since post WW2 sprawl came into effect).

    • RD -> “people are addicted to credit and any serious attempt to reign it in will instantly thrust our economy into recession.”

      Yes. But at the same time that doesn’t mean we can inflate debt, with low interest rates, forever. We are going to hit walls, one way or another.

      • They will continue to monetize the debt and as long as wages are suppressed, price inflation will not be a problem unless it is inflation related to the costs of inputs (over which they have basically no control). Without the threat of inflation there is no reason/incentive to raise borrowing costs.

      • Growth has been goosed as new credit is extended: if buying power doubles quickly in conditions that encourage people to spend, clearly that helps monetary velocity. But even without interest rates rising, the party’s got to end. We can’t keep being offered new credit at the same rate, or eventually I and every other lower-middle class income family would have a billion dollar credit line and our own personal Lear jets. Clearly this is not going to happen.

    • ignore this article. lew rockwell is a goldbug randroid. unless of course you like paranoid, conspiratorial nonsense.

  3. Real Estate Tsunami

    Here, in Ditchmond, the increase in House prices has mostly been driven by German speculators buying multiple units with the aim of flipping them for a handsome profit.

  4. Who are these young minds asking, in the midst of the biggest building boom the country’s ever known, why developers aren’t building enough houses?

  5. pricedoutfornow

    “Someone is going to be left holding that bag… And it isn’t going to be me.”
    Um, I think it WILL be you, as a Canadian taxpayer, courtesy of the CMHC. We all know if this bubble pops, we, the Canadian taxpayers will be on the hook. Whether you participated in the speculative mania or not.

    • Yes, to a certain fractional extent… but nothing like to the same degree as a young person who promises a life of servitude in order to give a boomer-owner a lottery-winning cash-out by buying their home for three times its fundamental worth.
      It’s the late buyers who will be left holding the largest portion of ‘the bag’.

  6. thanks Robert Dudek – there’s at least one poster who answers the question instead of bitching and moaning

  7. It’s because 70% of households own homes. They want their home prices to go up. They’re voters. The govt institutes policies to make home prices go up.

  8. I recently moved to Halifax from Vancouver for grad school and its amazing how much more enjoyable life is when your debt free. I sold my loft in a seedy part of gastown that i bought for 168k in 2005 for 520k in 2011. Paid 220k for a nice 600sqft 1bdrm in downtown halifax, and now I’m debt free at 26. I’ve got 200k in cash in the bank too, how many 26 year olds can say that! and i have all of this thanks to the insanity that is the vancouver real estate market! I feel for these people though, our generation really got the shaft when it comes to the economy and real estate. I’ve got plenty of friends who did everything they were supposed to do to succeed in life and are working temp jobs to pay off 100k in grad school debts. If i didn’t have supportive parents i don’t know where i’d be right now.

  9. If Dudek was correct, rents would track housing sale prices. However, we’re a little blind to the effects of the CMHC allowing highly-leveraged mortgaged….and now the subsequent de-leveraging. Taipan produced calculations on the effects on affordability.

  10. Pingback: A Big ‘Thank-You’ To The Insanity Of The Vancouver RE Market – “I sold my loft in a seedy part of Gastown that I bought for $168K in 2005 for $520K in 2011. Paid $220K for a nice 600sqft 1bdrm in downtown Halifax, and now I’m deb

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s