To revive Canada’s economy, housing prices must fall, property investors must take a hit

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John Rapley is a political economist at the University of Cambridge and the managing director of Seaford Macro.

Canada’s economy is struggling just now, beset by both a housing crisis and a growth rate so low that real per capita income is falling. But what many of us don’t know is that the first problem is a principal cause of the second – which is to say, Canadians on average are getting poorer in no small measure because property investors have got richer. There’s probably no way around it: to revive the economy and overcome the housing crisis, property investors will need to take a hit, at least in relative terms.

Politicians don’t like to admit this. Prime Minister Justin Trudeau did say that “house pricing cannot continue to go up.” But what about bringing prices back down? When he became federal housing minister, Sean Fraser had said he wanted to fix the housing crisis without lowering house prices. His statement reflected what seems to be a widespread view that the private sector can be left to supply new houses for the market, leaving the public sector to focus on homelessness and concentrate its resources on building social housing. That way there would be minimal disruption to the demand and supply conditions in the property market.

But this is flawed logic. Trying to rope off public and private markets is no easy task. It was a feature of centrally planned economies in the Soviet bloc, and the prices in one part of the market eventually affected those in the other, whether legally or in a shadow economy. Research suggests that once the supply of housing increases, regardless of the segment of the market in which it is built, prices are depressed across the board. And lo and behold where it has been possible to ensure the supply of new housing has risen, prices have fallen, with Minneapolis, Minn., being a celebrated recent case.

Some worry that falling house prices would harm the economy, given the weight of the sector. But that’s just the point: if real estate is too big to fail, it’s too big. Think of it the other way around. If renters or homebuyers had to pay less for accommodation, they’d have more left over to spend on other things. So, too, businesses that had to pay less for their premises would have more left over for reinvestment in the enterprise. In fact the case of Minneapolis, one of the cities with America’s lowest inflation rates, reveals the economic benefits of such an approach.

The structure of the economy determines how resources are allocated. And right now, Canada is allocating a lot of its income to a sector that produces little output. Shifting resources away from rent-seeking toward productive activities would cause short-term pain in the rent-earning part of the economy. However, it would also improve the prospects of the broader economy accelerating.

Editorial Board: A fairer way to share the costs of ending the housing crisis

I recently had coffee with a lawyer who advocates for the implementation of the right to housing. This would require legislative regulation of property investors like REITs or private equity funds, requiring them to strengthen tenancy rights or allocate a significant percentage of affordable units for lower-income households before getting planning permission or regulatory approval for new products or construction. Such proposals trigger the usual objections – that they violate the property rights of owners, or they reduce local democracy by removing the ability of owners to object to new developments in their community.

Such arguments hold little water, though. Regulatory measures don’t affect property rights, they affect the structure and conditions of the market in which owners operate. They exist everywhere. Canada’s regulatory and policy environment happens to favour investors, but that’s a political choice, not a function of the market. Other countries, such as Singapore, have built thriving market economies amid highly regulated real estate sectors.

Meanwhile the argument for democracy, while oft heard, barely withstands scrutiny. Allowing existing property owners the power to block new developments is less akin to democracy than oligarchy, as it amounts to assigning special powers to people based on their property ownership – in effect, a property franchise. And if they use the power to block other people gaining the right to own property, they are limiting those people’s right to an effective franchise, which is the essence of democracy. Western countries scrapped property franchises a long time ago. Trying to restore them through the back door should be called out for what it is: anti-democratic.

What fascinated me most about my conversation with the lawyer was that while she and I began from completely different starting points, we arrived at a similar destination. She approaches housing as a human rights issue, I see it as an economic one. When I look for the causes of Canada’s economic funk, I keep coming up against the housing crisis.

An abundance of affordable housing for all would lower infrastructure costs, thereby increasing labour mobility to produce more efficient resource allocation, enabling Canada to better exploit the economies of agglomeration that will be essential to the knowledge-intensive production that must be our future.