A prediction about the many measures the federal Liberals have promised to make houses more affordable: None will work.
Housing affordability for the masses was a post-Second World War phenomenon that no longer applies, according to Dr. Brooke Struck, a behavioural science expert who recently authored a report on millennials for the research arm of FP Canada, which oversees the certified financial planner (CFP) designation.
Early indications suggest another year of massive price increases in the Canadian market, which means worsening affordability. Dr. Struck’s take on housing won’t ease the frustration of buyers who feel priced out, but it offers perspective on how we got to where we are and what may be done about it.
“We have this idea that having a large middle class, with most people owning their own home, is a normal thing, a standard or a default we can fall back on,” said Dr. Struck, research director at a consulting firm called the Decision Lab. “But it’s really not.”
He says the origins of the homeownership boom in Canada go back to the period after the Second World War, when multiple factors combined to make it easier to buy a house. Among them was the creation of Canada Mortgage and Housing Corp. to absorb some of the risk for banks in increasing affordable lending to soldiers returning home.
The postwar period was also a time of huge government stimulus and economic growth that raised the prosperity of the middle class in a way not seen before, Dr. Struck said. The period marked the start of the baby boom, a jump in consumer spending and a rush of home-building in the suburbs.
Economic growth eventually fell to much lower levels than in the postwar decades, but home prices kept rising for reasons that include a long decline in interest rates. Dr. Struck said low rates have done all they can to make houses affordable. In any case, rates are likely to rise in the year ahead.
The affordability gap in housing today is best understood through the widening differential between growth in incomes and in home prices. “Thinking about it as a housing problem is the wrong way to go,” Dr. Struck said. “It’s actually an income problem. Since the late ‘70s or early ‘80s, median wages have not kept pace with the overall growth of GDP. We need people to be earning more money.”
Housing numbers released this week show the average resale home price was up 17.7 per cent in December over the same month a year earlier to $713,542. The average price in December, 2019, was around $517,000, which means a two-year total gain of 38 per cent.
Meanwhile, incomes as measured by hourly wages have recently grown at an annual rate of 2.7 per cent, similar to the long-term average. We have yet to see inflation cause a big run-up in income, although a recent Bank of Canada business outlook survey suggests it could happen this year. Will wages be up 38 per cent over two years? You know the answer.
Dr. Struck says economic policies that lead to higher incomes are the way to fight housing affordability. What we’re going to see instead from the federal Liberals in the year ahead is a much more traditional approach centred around housing.
In the election campaign last fall, the party promised to address affordability with measures to discourage buying homes as an investment, the creation of a Tax-Free First Home Savings Account, more generous tax credits for buyers and making mortgage default insurance cheaper and more accessible in cities with home costing $1-million or more.
Dr. Struck sees these measures as a poor substitute for the conditions of the postwar housing boom. “You’re putting a little bit of juice into the machine, but you’re not addressing the underlying problem,” he said.
What’s needed is for the entire economy to grow in a way that pushes up median wages, he said. Wages surpassing or even keeping pace with economic growth would bring us back to one of the key conditions of the postwar housing boom.
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Millennials are the generation that most directly confronts the loss of home affordability, said Dr. Struck, who is himself a millennial. He sees people of this generation living in a world like we had in the prewar world. Less affluence, worse housing affordability.
In no way are young adults responsible for their troubles affording houses, he said. “Hard work just got you more a couple of generations ago than it gets you now.”
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Rob Carrick