Housing Isn’t Meant to Be Affordable

This article was originally published, in slightly different form, on Strong Towns member Michel Durand-Wood’s blog, Dear Winnipeg. It is shared here with permission.

One of the most talked about issues these days is housing affordability, or rather, the lack of it. Whether talking about the ability to afford housing in general, or “Capital A” affordable housing (aka social or public housing) specifically, it seems nearly everyone agrees that housing isn’t affordable for too many people. And it’s getting worse.

But that’s not a bug of our current housing policies. It’s a feature. That’s how it’s supposed to work.

Let me explain.

How many times have you heard that “your home is your biggest investment”? It’s something we’ve been told for so long, that it has become ingrained as prevailing wisdom. So much so that, according to a Leger survey commissioned by RE/MAX last year, 73% of Canadians view homeownership as the best long-term investment they can make.

But what does it mean for something to be a good investment? It means the price has to go up. And the higher the better.

But if housing prices keep going up and up and up, eventually they become unaffordable to more and more people.

So if housing has become unaffordable, it’s because our housing policy has worked! Yay!

Unfortunately, housing can’t be both a good investment and broadly affordable. That’s what Strong Towns calls the Housing Trap. And we’re in it.

I had the opportunity to read a preview copy of "Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis" by Chuck Marohn and Daniel Herriges. In it, they detail how U.S. federal housing policy being historically designed to stimulate home prices, coupled with local zoning policies that are designed to restrict supply, have led us to today’s crisis.

Not to spoil the book for you, but one of its most compelling aspects is a graph of U.S. home prices from 1945 to today.

The period between 2000 and 2008 is widely called a “housing bubble,” even by the country’s most senior economic officials. So then, why is the period after that called a “housing recovery”?

As they say in the book:

A financial bubble is, by definition, unsustainable. A post-bubble recovery in the housing market, one that restores it to unsustainable levels, feels like madness. It is the kind of approach a society would pursue only if there were no other choice. The post-crash re-creation of the 2000s bubble demonstrates just how dependent on housing the American economy is.

— Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis, pg 64-65.

Of course, any smug Canadians reading this probably had the same thought as I did: Sure, that’s in America. It can’t possibly be as bad here in Canada.

And you’d be right. Housing prices are not as bad in Canada as they are in the States. They’re actually much, much worse.

According to data from the US Federal Reserve Bank of Dallas, indexed home prices in the US are 88.1% higher than they were in 2005, near the peak of the “housing bubble,” making it the second highest of the G7 countries. [Literature fans will recognize that as “foreshadowing.”]

The third highest in the G7 is the UK, with housing prices 83.7% higher than in 2005. Germany and France round out the Top 5 with 74.8% and 53.7% increases since 2005, respectively.

So, who’s number 1?

Canada, baby! Woo! We’re number 1, we’re number 1!

The Canadian housing price index is 206.8% higher than it was 20 years ago.

U.S.: Hey, you know the housing bubble that basically took down the global banking system and plunged the world into a recession so great we actually called it the Great Recession? Watch me re-inflate it to almost twice its original size!

Canada: Hold my beer.

— If our countries were two bros in a bar

But that’s far from the end of it.

When home prices rise, you end up spending more money on housing. But that money doesn’t produce more goods and services in the economy; it’s just dead money. Or, as economists call it, “non-productive investment.”

Housing should grow as the economy grows, of course. A growing economy generally means more people, and those people need a place to live. But when housing grows at a faster rate than the overall GDP, that’s usually an indication that too much money is being spent on speculating in the housing market, instead of being spent on more productive things in the economy, like machinery, equipment and other things that create more jobs. If it gets too far out of whack, it becomes a big risk for the economy.

At the peak of the housing bubble in 2006, housing made up 7% of the US economy, a level considered “toxic” by many experts. In Canada, at the end of 2023, housing made up 7.8% of our economy.

Canadians today are spending so much of their revenue on housing that it’s even cutting into their food spending. Yes, despite skyrocketing food prices, Canadians are now only spending 18% of their income on food, compared to 21% in 2017, which works out to about $91 per month short of meeting your nutritional needs, according to Statistics Canada.

This declining standard of living is what the Bank of Canada is calling a productivity crisis. Rising productivity in an economy generally means a higher standard of living for everyone. Unfortunately, Canada has seen no productivity growth in nearly a decade.

“And over the past four decades, we have actually slipped significantly compared with some other countries. In fact, relative to the United States, among G7 countries we are now second only to Italy when it comes to productivity decline.”

— Carolyn Rogers, Senior Deputy Governor at the Bank of Canada

And to add insult to injury, when GDP grows but productivity doesn’t, you risk getting… wait for it… inflation!

In case you’re not sufficiently horrified, there are now concerns by the Canada Housing & Mortgage Corporation (CMHC) that total household debt in Canada, made up largely of mortgages, is now higher than the value of the country’s entire economy. There’s also a Statistics Canada study warning that our housing market is resembling a return to Victorian-era “patrimonial capitalism” (or “inheritance culture”).

Yikes.

Hey, here’s a fun fact: did you know that 75% of this year’s $40 billion federal deficit is due to the government buying its own mortgage bonds?

When you get a mortgage at the bank, the bank packages it up with other mortgages and sells them to CMHC, who in turn packages those up with others bought from other banks and sells them to global investors as Canada Mortgage Bonds. So the mortgage payments you make to the bank actually end up as the “returns” for bond investors throughout the world.

CMHC provides a guarantee on those bonds, in addition to default insurance on the underlying mortgages. And because CMHC is owned by the federal government, that makes those “returns” guaranteed by the full faith and credit of “His Majesty in right of Canada,” aka the federal government, making the bonds as close to risk-free as federal government bonds.

That helps keep mortgage rates low in Canada. And low rates have been shown to push housing prices up.

That’s all well and good as long as there is sufficient demand for Canada Mortgage Bonds by global investors. But when there isn’t, like now, that pushes bond prices down, which pushes interest rates up, which pushes housing prices down. So the federal government is borrowing money to buy its own bonds to prevent that from happening.

Don’t worry if you didn’t understand all of that. What it means is that three-quarters of the money the federal government will borrow this year is being used to make sure housing prices keep increasing. And with interest rates widely expected to start to lower soon, CMHC forecasts housing prices to rise as much as 20% over the next two years.

So much for affordability.

Even if you’re one of the lucky ones who already owns their home, housing affordability for others matters to you, too. An RCMP report recently made public through a freedom-of-information request highlights lack of affordability as one of the biggest threats to national security, along with climate change, disinformation and possible Russian encroachment on the Arctic.

“The coming period of recession will … accelerate the decline in living standards that the younger generations have already witnessed compared to earlier generations… For example, many Canadians under 35 are unlikely ever to be able to buy a place to live.”

— Royal Canadian Mounted Police (RCMP), Whole-Of-Government Five-Year Trends For Canada

Turns out that a return to Victorian-era practices of locking out an entire class of people from land ownership tends to lead to civil unrest and revolt.

Ok, so housing prices can’t keep rising if we are to avoid the worst outcomes, like open rebellion in the streets. But housing is now so intermingled in our economy that we can’t let them fall either. Interest rates have only gone up a few percentage points, pushing housing prices down a bit, and already many people are struggling. Plenty of sources are warning of an impending financial crisis if rates don’t come back down soon.

We’re screwed if housing prices keep going up. We’re also screwed if they go down.

That’s the trap.

It should be obvious by now that the housing crisis is a complex, multi-faceted issue. There is no one silver bullet for addressing it. Unwinding the trap in a way that doesn’t cause a new Great Depression is going to take a lot of different changes working together in order to shift to a housing market that is responsive to local needs, rather than to global capital flows and national fiscal and interest-rate policy.

We need to rapidly add more housing at affordable price points. We also need to avoid crashing the current housing market. We need to encourage investment in our communities, increasing local economic productivity, without allowing all the profits to be siphoned out to faraway global investors. And we need to do it without adding more infrastructure liabilities to our already struggling cities.

What that will look like is more people doing home-to-duplex conversions, building backyard cottages, allowing more small businesses to mix into our residential neighborhoods to create local jobs while eliminating productivity-killing commutes, and growing local financing options.

Yes, it will require some actions by the federal and provincial governments, like building more public (“Capital A”) affordable housing, modifying building codes so triplexes and fourplexes fall under the residential code, and allowing point access blocks.

Just as importantly, a lot of it will come down to actions by local governments (removing parking minimums, allowing fourplexes as-of-right, speeding up permit processes, etc.). Transportation policy will come into play as well: if road expansions incentivize greenfield development, then doing the opposite (creating more walkable places) will incentivize infill.

But it’s not just local government. Most of the heavy lifting will be done by citizens, non-profit organizations, community groups, credit unions and more. We all have a role to play in unwinding the trap.

There is no single way out, and many actions may have unintended consequences. The key to achieving the best outcomes will be a combination of many small steps with tight feedback loops.

So let’s get to it!

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