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Unless you have been living under or a rock or have absolutely zero interest in buying a home, Canada’s seemingly meteoric rise in home prices over the last few decades is still a hot topic.
It seems as if every year, we have a high year-on-year growth in home prices despite many complaining it’s already near impossible to buy a home outright and despite these prices already reaching unprecedented levels. Here are just some of the increases in prices measured from February 2016-2017.
- Two-storey family homes grew by 17.9%.
- Apartments grew by 13.7%.
- Townhouses grew by 16%.
- One-storey homes grew by an average 15% nationally.
This on top of the fact that Canada’s average home price is already soaring high at over $500,000. However, if the hot zones Vancouver and Toronto are excluded, it sizzles down to a still searing $370,000.
What is the government saying and doing?
The government has regularly tried to fix the problem through legislation, mostly focused on curbing demand. This included:
- Making it tougher to qualify for a mortgage by introducing a stress-test, making amortizations shorter, and tightening requirements on lenders.
- Trying to dissuade foreign investors from buying property in Canada.
Despite the introduction of these, and other measures, it has barely had a marked effect on the market. In fact, prices seem to be going up faster.
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Why are prices still growing?
To many, it should seem like our predicament is completely inexplicable. After all, the laws of economics are fairly simple. The less demand there is (let’s not forget that demand does not only include people that want something but also those that are qualified to actually purchase it), the more there should be a surplus in supply, and prices should gradually start to fall.
In a housing market, this would mean more and more empty houses. In their desperation to fill them up, prices should go down to entice new buyers. It stands to reason if you make it harder to get a mortgage or disqualify more buyers through legislation, that that’s exactly what should happen. So, why aren’t we witnessing these effects?
The answer is partly that legislation meant to curb demand actually cut supply. Here’s what happened: Since tougher legislation was introduced to lessen the number of people that would qualify for a mortgage, what they actually did was make it impossible for people who could previously afford a mortgage and are now homeowners to refinance or apply for a new mortgage on a new home.
This effectively led to homeowners sitting tight on their property and making it more difficult for new prospective buyers to enter the market. Let’s not forget that Canada’s economy is growing at an impressive 3.2% which does mean a slow uptick in new potential buyers every year.
Why are prices still growing?
It’s slowly becoming clear, even to the big-wigs in government, that the only avenue left to try and cool the market is to slowly start the process of delegislation, particularly concerning home mortgage requirements.
However, this is a problem that won’t solve itself easily and focussing on the wrong things such as drastically reducing housing prices in a short amount of time will only lead to far greater economic damage. For now, it seems the best course of action is to slowly delegislate, stay patient, and let the natural course of things try to establish a balance.
One thing that is clear is that legislation has made it harder for people to apply for mortgages without seemingly stemming the actual rise in prices. It might be time to try something a little different.
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