Even before COVID-19, Canada was experiencing a rapidly expanding housing bubble. As a matter of fact, it’s the biggest housing bubble of any G7 country, even bigger than the housing bubble that instigated the crash of 2008. While the bubble has been inflating out of control for years, the only question is: why hasn’t it popped yet? COVID-19 may have provided the shock to do just that.
Since 2005, Canadian real estate prices have increased by a brutal 88 percent. Germany is the next closest G7 country at merely 32 percent. The situation is especially bad in Toronto and Vancouver, who have the second and seventh biggest housing bubbles in the world, respectively. This has directly translated to exorbitant rents. In Vancouver 22 percent of renters spend more than 50 percent of their income on rent.
The state of the housing market was initially put into question by the COVID-19 pandemic, but as economist Robert Hogue of RBC put it, COVID “did not destroy this year’s spring market—it mostly delayed it.” Going into the pandemic, real estate markets in the country were heating up. But in spite of the COVID-19 shock, this trend largely continued with prices increasing by 2.34 percent nationally in July alone. Ottawa saw the largest jump at 2.99 percent, and Montreal saw an increase of 2.82 percent. Edmonton saw the smallest increase at 0.5 percent, but even that has been described as “unusually large.”
Staring down the deferral cliff
Certain “experts” remain confident that this current momentum makes the prospect for a crash unlikely. Scotiabank has stated that concerns over the housing market are “overblown,” and that “COVID-19 is not expected to have a large or lasting impact on house prices.” The Financial Post even put out a guide on how to take advantage of current prices just last month. However, the relative stability of the market is entirely conditional.
Back in April, the federal government instituted measures allowing mortgage payments to be deferred for up to six months. But this program will begin to expire in October, and experts are now warning of what they call a “deferral cliff,” where unemployed people will soon be required to begin paying back deferred payments on top of their resumed payments. The Canadian Mortgage and Housing Corporation has stated they’re eyeing “new tools” to help mortgagers handle the crisis, but someone is going to have to pay up eventually. On top of that, immigration could play a major issue as well. With COVID restrictions, Canada has seen a 67 percent drop in the arrival of new permanent residents, which will leave the housing market with significantly less demand.
With this in mind, the true impact of COVID won’t be known until the end of the year. According to the Macro Research Board, Canada will need to enjoy a “V-shaped” recovery in order to avoid an all-out crash, but such an aspiration remains next to impossible. Things are so bad that investors who profited off of the U.S. housing collapse in 2008 are now betting against Canada.
How did we get here?
How has the bubble gotten as bad as it is now? After the 2008 financial crash, Canada managed to stay somewhat unscathed—compared to other countries, at least—due to entirely accidental reasons. The economy was kept afloat by the oil boom and China, which consumed a significant amount of Canadian oil and minerals. But now these conditions have turned into their opposite. China has undergone an economic slowdown, which means they’re importing less from Canada, and the global slump in oil prices has left the economy embroiled in crisis.
Canada attempted to overcome these issues by doubling down on housing. Finance, insurance, and real estate currently make up a record 19.53 percent of Canada’s overall GDP. In 2018, Global News noted that real estate composed a monstrous 76 percent of Canada’s wealth, and in 2019, over half of Canada’s GDP gain came from real estate transactions. With the pandemic, this trend has reached new heights. The Bank of Canada has been dropping interest rates to decade lows, and reassuring investors that they will remain low.
The federal government has opened the floodgates and pumped $700 billion into the country’s largest banks and corporations, only spurring investment on even further. The speculative nature of this investment is evident in the fact that there were more homes sold in July than any other month in the past 40 years. Considering this is during a time of unprecedented unemployment and personal debt, it suffices to say that these aren’t ordinary working people buying homes. These are rich investors who are opportunistically looking to turn a profit. The market has ceased to reflect the reality of the majority of the population.
Bubble waiting to burst
All of this ultimately leads to inflating the bubble further. Canada has been relying on speculative investment to prevent a generalized economic crisis, but in doing so has only prepared the way for a greater crisis. The bubble is going to burst sooner or later, and when it does, the effect it will have on the economy will be catastrophic.
The housing crisis represents one of the biggest contradictions within capitalism. There’s no reason for us to be spending so much money on housing—we don’t even have a shortage of homes. In fact, we have an overabundance. In an article last year, we noted that there is a ratio of 5.5 empty homes for every homeless person in Canada. In Toronto, the biggest housing bubble in the country, that number is seven. Yet we find that instead of a rational distribution of resources, investors continue to pump billions into an already inflated market to build homes that will remain completely dormant. The ultimate cruelty is that the outcome of a housing crash would leave even more people thrown out onto the streets.
Private property remains the primary barrier to providing high-quality, affordable housing. We are more than capable of providing every homeless and underhoused person and family with a decent place to live. But private contractors and real estate providers don’t care about providing housing, they only care about making money. Capitalism provides us with no way forward. Only in a socialist planned economy would we be able to rationally plan housing to provide high-quality housing to everyone.