extrinsic demand

Sometimes, Doug brings me pages from the newspaper, which he reads over his morning coffee.  Usually, these pages relate some interesting tidbit about a client or an ongoing topic of interest and discussion around the NetGain office.  It was immediately evident why Doug wanted me to see a clipping, torn from The Globe and Mail last week.  Here, Josh Gordon criticizes the misleading reporting of historical housing market data on ‘non-resident’ ownership, released in December 2017 by Statscan and the Canada Mortgage and Housing Corp. (CMHC).

In February 2017, Doug wrote a post criticizing real estate industry representatives, politicians, and the media for uncritically accepting misleading data.  They would have us believe that non-resident buyers have no significant impact in local real estate markets.  These assertions were based on an ad hoc survey published by the Toronto Real Estate Board (TREB).  Doug warned that the data was specious, gathered and analyzed with a purpose.

While the recent Statscan/CMHC report on non-resident ownership is certainly more accurate and reliable than TREB’s, it does not actually provide an answer to the question of whether non-resident buyers are impacting prices in Canada’s hottest market.  Nonetheless, politicians and the media have presented the data as if it proves that external demand has no impact on housing prices. This assertion is problematic in at least three respects.

  • First, the Statscan/CMHC data refers only to housing stock – i.e., properties which are not on the market. In order to better understand current housing prices, we have to look to the state of ‘flow’ – the people and properties active in the market, which is where prices rise or fall.
  • Second, ‘non-residency’ refers to a narrowly defined group of owners (including Canadian nationals living abroad) and in no way encompasses other possible avenues for external capital to enter the local market, such as the use of proxy buyers or shell corps.
  • Third, even a very small number of buyers can have a disproportionately large influence on prices within the housing market.

‘Decoupling’ occurs as the housing price to income ratio increases, corresponding to lack of affordability, and is rarely as drastic as reported in Richmond Hill, where, in 2017, the average home price was twenty times the average income.  Gordon points out that, in the rest of Canada, average household prices are usually around three or four times the average annual income level, a ratio which is generally considered ‘affordable’.  Non-resident buyers have a decoupling effect because they aren’t constrained by local wages and other trends.  Consequently, they are able to outbid locals, sometimes by a large extent, effectively determining housing prices with no relation to local economic indicators, such as income levels.

Gordon goes to the heart of the issue, identifying both the cause and consequence of the problem.  He proposes matching housing purchases with data from CRA.  If we look at the proportion of homes purchased for a million dollars or more by people who have reported less than $50,000 in lifetime income tax payments, we may gain a clearer picture of whether external capital is driving up the cost of homes.  Moreover, linking housing purchases to the amount of Canadian income tax paid makes the economic impact of extrinsic speculation more visible, forcing us to see another dimension of the problem.

Extrinsic speculation, whether Canadian or international, sets housing prices out of keeping with local economic realities.  However, if evasive measures like proxy buyers are used, it means that profits made through sales are channeled back to non-Canadian beneficiaries.  If non-resident buyers are taking advantage of the lax corporate laws in Canada to create shell corps, they could entirely bypass Ontario’s Non-Resident Speculation Tax.  Of course, all home owners would still be subject to property tax, but in Toronto, it’s pretty inexpensive, compared to other Canadian cities.

I’ll risk sounding pedantic here, but extrinsic pressure on real estate markets is really bad.  It means that people are accessing the privileges of return on investment without contributing to the local economy, except as consumers of a precious commodity.  But, it’s not just that people are getting a free ride – it’s much worse.  Over time, real estate speculation (particularly when profits are leaving the Canadian economy), is absolutely corrosive to community life.  It means that local residents, working full-time at decent wages, cannot afford to own a home.  In turn, people turn to the rental market, which becomes stressed through increased demand and prices rise drastically with detrimental socio-economic effects.  People move more often, relationships are destroyed, and overall social cohesion is hindered.

When housing becomes an investment commodity, people begin hoarding property they do not need.  The local way of life suffers, especially when investors aren’t creating jobs, paying consumption taxes, or otherwise contributing to the local economy.  How can we be a city with such a high cost of living and such strong social problems?

We should look at the economic system holistically to recognize how the housing bubble creates pressure from the top that pushes more people from the middle closer to poverty and seals the fate of those already in the bottom.  The argument for trickle down benefits does not apply here.  Rather, the housing bubble pressurizes people, forcing them out of the market, entirely bereft of its benefits.

In a report from last summer, Phillip Cross at the Fraser Institute outlined how Ontario’s economy has become dependent on housing industry in the GTA and significant cooling in this market would likely have a detrimental effect province-wide.  While speculators and real estate industry leaders may be motivated by financial gain to perpetuate an unsustainable market, politicians do not want to be left culpable by admitting that there is a problem.  Perhaps this is why John Tory refuses to raise property taxes in accordance with the rest of Canada – a measure which would allow the City to allocate more of its budget to addressing social issues.  It’s unlikely that this situation is due to direct malevolence on the part of anyone; rather, it seems to be the result of ostrich-like denial, opportunism, incompetence, and lack of serious opposition to the uncritical acceptance of our dependency on an inflated real estate development industry.

Hopefully, it won’t take a crisis for Toronto and the Province to begin loosening their dependence on housing.  Hopefully, we won’t be annoyed by any more news stories where definitions are stretched and facts misrepresented.  Hopefully, the provincial and municipal elections this year will provide us with viable candidates dedicated to meaningful and sustainable change.

But, at NetGain, we eschew wishful thinking, and I suspect that you’ll probably be hearing a lot more from us here in the coming months.

1 Response

  1. Great article!