A person walks past a house for sale in the west end of Toronto, on Sept. 19, 2023.Sarah Palmer/The Globe and Mail
Prime Minister Justin Trudeau appears to believe he can amend a heretofore inviolate law of economics: that of supply and demand.
He said as much in a recent appearance on The Globe and Mail podcast City Space in which he talked about housing affordability. He was asked whether current homeowners will have to accept some sacrifices so aspiring homeowners – who are presently priced out – can enter the market.
“I think anyone who hopes for the housing prices to remain on the kind of trajectory they’ve been on over the past decade or two should maybe think about what kind of society and world they want to live in, where only people who either inherited wealth or had very, very good timing” are able to buy a house, Mr. Trudeau said.
Sensible enough so far. A lack of supply (which this space has written about before) and high demand have led to skyrocketing prices.
For many residents, especially younger ones, Canada’s housing market is out of reach. Prices now exceed $735,000 across the country, and are well over $1-million in hot markets like Toronto and Vancouver. The cost of rent has also been climbing. All of this has threatened families’ economic circumstances and our larger social cohesion.
So prices should come down, right? Well … not so fast.
“But housing needs to retain its value,” Mr. Trudeau continued. “It’s a huge part of people’s potential for retirement and future nest egg. I mean, the difference between someone who’s rented all their lives versus someone who is a homeowner in terms of the money they have for retirement is massive, and that’s not necessarily always fair.”
Much of this is also true. Many Canadians are relying on the equity in their homes to fund their retirement, because of poor savings (some of which is due to the high cost of living) and the declining prevalence of private-sector pensions.
But here’s the rub: the Prime Minister can’t have it both ways. Housing is inaccessible right now because it is too expensive. The only way to increase access until supply can catch up to demand is for prices to drop.
In the utopia he describes, there would be more homeowners (more supply), thus fewer aspiring homeowners (lower demand) – but continued high prices.
This would defy the law of supply and demand. He might as well ask the apple coming loose from the tree to fly straight up.
Politically, Mr. Trudeau is trying to encourage younger generations priced out of home ownership while also soothing the anxieties of older homeowners who don’t want to see their equity decline.
The Liberal government already tried to thread this needle with its First-Time Home Buyer Incentive. Ottawa offered to partially subsidize the purchase of a home in return for a small equity stake (5 or 10 per cent).
But, as this space argued before, such a program would just artificially inflate the purchase price of a home by giving the buyers a larger budget.
(As it turned out, the program had dismal uptake and was cancelled, because the maximum house price it would subsidize was too low to buy anything in the hot housing markets in which buyers needed help.)
There is really only one way to improve affordability while not lowering home prices, and that is if housing prices stagnate and incomes catch up. This happened after the real-estate crash in Toronto in the 1990s, and in Calgary after the commodity bust of the 2010s.
This wouldn’t provide any imminent relief to priced-out Canadians, or to Mr. Trudeau, who faces re-election next year. But it would be a good long-term solution.
To improve incomes, the government must get serious about addressing Canada’s declining economic productivity. There are many ways to do so, including by fixing the immigration system and incentivizing companies to make innovative investments in their technology.
A focus on productivity would have a number of economic benefits for Canadians, including, but not limited to, improving housing affordability. But it will only work in conjunction with building more, and more dense, housing supply.
Because right now, much of the value of housing is in its scarcity. Promising to protect that value is just another way of saying you’re protecting the status quo that locks many Canadians out of homeownership.