Canada has become a hostage of its own housing bubble

At the beginning of the millennium home prices began rising faster than incomes. As time went on, housing became less and less affordable. When the global financial crisis hit in 2008 real estate values continued their rapid growth even as markets crashed in the United States and Britain. For a quarter-century rising housing costs outpaced wages, pricing out generations of Canadians and pushing thousands into homelessness.

What would it take for home-price-to-income ratios to return to the level of the early aughts? What would need to happen for housing to become affordable again?

International case studies and examples from our own history show that a return to affordability will require massive investments in publicly and cooperatively owned housing totalling somewhere between 20-40 percent of all homes in high-rent cities. It will also require pro-renter policies like effective rent control and meaningful landlord regulation.

This kind of decommodification campaign would lower housing costs, but its unintended consequences would reverberate across the country. Falling housing prices means shrinking pensions, broken nest eggs, and negative equity for anyone with an expensive mortgage. The nation has grown around housing speculation the way a tree grows around a rusted fence post—its presence warps the growth but removing it now could split the trunk.

Over one million households bought their homes at peak prices; any significant decline in value would leave those families owing more than their house is worth. Analysts have said that a 10 percent drop in home prices could increase homeowners’ negative equity by $10 billion. A 30 percent drop puts Canadians $46 billion underwater on their mortgages. For people who scraped together enough money to buy into the market at record high prices, falling property values would have them paying debts well beyond the value of their assets.

This debt is not just a homeowner problem, it is a core asset for the financial sector. Banks now hold over $3 trillion in household debt, 75 percent of which is mortgage debt. If real estate prices fall so far that people start to default on debts that no longer make sense to pay, the integrity of the entire financial system is put at risk.

Declining home values would also cause significant harm to those who paid off their mortgages year ago. Elders have come to rely on high home values to fund their survival. In fact, 44 percent of Canadians are depending on the sale of their home to sustain them in their golden years. Even those who do not own property have their post-employment futures bound up in housing. Public and private pensions, including eight percent of total CPP assets, are heavily invested in Canada’s real estate market (down from a high of 12 percent in 2020). Real estate values have become synonymous with a dignified retirement.

Half of us are depending on an ever-expanding real estate bubble to sustain our financial wellbeing while the other half faces a life of precarity until the bubble deflates.

For those on the renters’ side of this divide any discussion of the downsides of lower home prices may feel like asking for sympathy for the devil, but with nearly half of household wealth tied up in real estate, falling property values would do more than lower the net worth of the one percent. Deflating the bubble and restoring sanity to our housing system would have far-reaching consequences that threaten the economy as whole.

On a macro level, real estate accounts for between 13-15 percent of GDP. Finance and insurance, whose market share is inextricably bound up with real estate, account for another eight to 10 percent. Nearly a quarter of total GDP could crumble under the weight of falling housing prices. Additionally, real estate has also dominated national growth statistics in recent years, with rising property values accounting for as much as half of total GDP growth. A precipitous drop in home prices would crater national growth rates and gut GDP.

If prices were to crash, either through the anarchy of the market in a 2008-style event or as a result of a deliberate pro-affordability policy, the government would have to address these myriad problems or face disaster. The consequences of affordability go a long way to explaining why Justin Trudeau insisted that “housing needs to retain it’s value” and why Mark Carney, whose fall budget signalled major cuts to federal housing programs in 2028, is committed to walking his predecessor’s path.

Ironically, the retention of value may be how we thread this needle. If housing simply retains its nominal value as the rest of the economy experiences regular inflation the real price of housing would fall gradually over time. This is exactly what happened in the 1970s when nominal home prices stagnated and real prices fell by 30 percent in just five years. This road to affordability has many advantages including the fact that negative equity would not become endemic, banks would not face the risk of widespread default, and retirees would be able to plan for their future. This kind of gradual decline in real prices would also give pensions enough space to continue their gradual withdrawal from the housing market. However, controlled price deflation would still hobble economic growth and take a chunk out of GDP.

Whether it is restored gradually or all at once, politicians will have to address the consequences of affordability eventually. We need our leaders to step up with ambitious policies capable of solving these complex, interconnected issues.

To give an example: if an affordable housing system means that property will no longer be able to function as a guarantor of a dignified retirement, OAS and CPP could be expanded dramatically to compensate. A long overdue reform of the tax system could be concurrently implemented to fund the right-sizing of these programs. A nation-wide jubilee project could also be initiated to ensure that people who bought into the inflated market aren’t stuck carrying odious debts. Depending on how co-operative our banking oligopoly is in this matter, the financial sector may end up being nationalized along the way. Finally, we could re-orient our economy away from finance and real estate and develop productive capacities designed for flourishing in the 21st century. A far-sighted industrial policy might include state-led investments in a domestic green technology sector, or the development of co-operatively owned manufacturing hubs capable of refining our abundant primary goods for export. Housing affordability is as good an excuse as any for Canada to finally climb the value chain.

The high cost of housing is no longer a single, discrete issue. It has become the organizing principle of our society. Pensions, banks, and GDP have grown around an assumption of ever-rising property values. Any project aimed at restoring housing affordability must contend with this fact and articulate a plan to reform the large swathes of the economy that depend on the commodification of our homes. The time has come to demand our leaders face this reality and propose a vision for a future built on something other than real estate speculation.

James Hardwick is a writer and community advocate. He has over ten years experience serving adults experiencing poverty and houselessness with various NGOs across the country.