Housing Crisis Explained

 

What caused the housing crisis?

The rapid escalation in the cost of both home ownership and rental accommodation in Canada and around the world has a multitude of causes, some more important than others. 

But, before listing the causes, let’s define the problem.  

According to Statistics Canada, the average price of a new house and land, as well as average rents, virtually doubled from 2003 to 2023 while the average hourly weekly wage was only up about 25%. These figures represent an average for the entire country and don’t portray the even more dramatic affordability decline for specific areas.

Beyond the raw numbers is the way in which declining affordability affects groups of people differently, based on gender, sexual orientation, nationality, race, age, physical ability and income. Studies have shown that, as housing became increasingly scarce, landlords in general became more discriminating based on the factors above. The 2020-2022 pandemic only exacerbated those difficulties. Then there’s the fact that declining affordability has a much more serious impact on someone who can no longer afford even low-end housing. The next step down is homelessness and often the loss of security, privacy and the ability to earn a living.

Below is a list of contributing factors to the rapid escalation in the cost of housing. It is not all-inclusive but it does illustrate the complexity of the problem.

    Housing costs

    What caused the housing crisis?

    1. Low interest rates: Central banks around the world lowered interest rates in both 2008 and 2020 to counter what was believed to be imminent financial collapse. That enabled people to borrow more money than they could afford previously, fueling demand and inflation.
    2. Increased money supply: For similar reasons, central banks expanded the money supply, or created more money, in the years following the 2008 financial crisis and the 2020 pandemic. Again, it fueled demand and inflation.   
    3. Financialization of housing: The availability of cheap money, and changes in tax laws, encouraged Real Estate Investment Trusts (REITs) and other financial institutions and investors to buy housing. The purpose of these new financial vehicles, often run by people hundreds of miles away, was to squeeze as much profit out of the investment as possible. That encouraged the practice of renoviction. Tenants were evicted on the grounds that renovations had to be done, then the rent was raised to whatever the market could bear for the new tenant, who usually wasn’t protected by rent controls.
    4. Failure to prepare for population increase: the number of newcomers entering Canada, including immigrants, refugees, temporary foreign workers and international students, increased dramatically in the last decade. But often planners and other municipal officials weren’t aware of such increases being planned by post-secondary institutions and governments, so they weren’t able to prepare for the increased demand for housing.
    5. Exit of government from construction and operation of affordable housing: the federal government got out of the business of providing affordable, or social, housing in the 1990s to reduce costs.  As a result, little affordable housing has been built since.  

    6. Failure of government to protect existing affordable housing: we lose existing affordable rental housing faster than we build new affordable housing because investors buy up such properties, renovate or destroy them, then charge an inflated price for the new properties which usually escape rent controls.
    7. Slow municipal approval process: developers say they are frustrated in their attempts to build more housing for what they describe as needless delays in the planning and approval process.
    8. Bad forecasting by Statistics Canada of housing inflation and international student increases. Our national statistics gathering agency has been criticized for not including the price to buy housing in its inflation calculation.  Instead, it tracks the cost of paying the mortgage and operating expenses. Critics say this methodology prevented Canada from catching, and addressing, the rapid escalation in housing prices earlier, making the problem more difficult to resolve. It has also been criticized for not predicting the dramatic increase in international newcomers.
    9. Development of a cohort of wealthy homeowners who got into real estate early, giving them the equity to bid up prices for both their own use and for investing. 
    10. Growth of condos over rental housing: Developers largely got out of building rental housing after the 1990s, with some saying it’s because of the elimination of federal tax credits.  
    11. Exclusive single-family zoning bylaws and Nimbyism: People in single-family neighborhoods often object to multi-family buildings, using exclusive zoning  and municipal bylaws to endlessly appeal, and the ballot box, to discourage such developments. This practice is often known by the acronym NIMBY (Not In My Back Yard).
    12. Failure of post -secondary educational institutions to keep up with demand for new student housing: Post-secondary institutions responded to the need for funding after the 1990s by dramatically increasing the number of international students. But they didn’t prepare for the need for more housing. As a result, international students had to compete for low-income housing, driving up demand and prices for both students and residents.
    13. Money laundering: there was considerable evidence, particularly in Vancouver and Toronto, of illegal money being moved into housing, driving up prices.
    14. Foreign investors: In recent years, Canadian governments imposed a tax on foreign investors who, it was believed, were buying properties in Canada to either hide money or to have a stable refuge in the event of political turmoil in their home country. However, the impact of this factor has since been called into question.
    15. Failure to develop properties already approved for housing: municipal officials complain bitterly that developments which have been approved for housing often sit idle for as much as several decades, thereby lowering the supply of housing and fueling inflation.

    Learn more:

    Why is housing so expensive?

    Some might say the answer is obvious: there simply aren’t enough homes to meet demand. So the answer is to just build more homes.

    But that answer ignores at least two issues:

        1. Housing construction has exceeded population growth in many instances but the price of housing still goes up. In other words, this isn’t simply a supply issue and there is no guarantee that taking a build, baby, build approach will make housing more affordable.
        2. If we leave it to the blind hand of the market, what kind of housing gets priority and when does it get built? Is it mansions on a former protected greenbelt or agricultural land? Is it multi-plexes and laneway units in existing city neighbourhoods? Is it purpose-built rental units and post-secondary student residences? Or is it social housing to save people from living in encampments? The blind hand of the market will build what is likely to generate the greatest profit.
      Why housing is so expensive

      Why is housing so expensive?

      The market may also decide that no housing will be built. Municipal officials complain bitterly that housing developments approved decades in the past remain undeveloped, worsening the housing crisis.

      It turns out then, that the answer to the question of “why is housing so expensive” is likely far more complicated than it first seems.

      For example, a report published by Statistics Canada in June 2023 noted that, from 2019 to 2021, Toronto’s housing stock grew by 3.5% (+61,320 properties) while its population only grew by 1.3% — a 2.2% increase in supply over population. Yet, the average price of a home, according to the Canadian Real Estate Association (CREA), went from $761,800 in January 2019 to $1,187,200 by December 2021 – a $425,400, or 56%, increase.

      A similar scenario played out in Vancouver where housing stock grew by 3.6% (+28,085) while its population grew by 2.1%.

      Obviously, there was more involved in the steep climb in the cost of housing than simply a lack of supply.  The most likely cause of the increase was a dramatic decrease in interest rates, and the expansion of the money supply, in response to the feared economic consequences of the COVID-19 pandemic.

      For a list of other factors contributing to the rapid rise in housing prices in both Canada and around the world, see “What caused the housing crisis”. 

      More than half of this growth was attributed to condominium apartments. In Toronto, 38,070 such properties were added during that period, and the number of net new row houses (+12,825) surpassed the number of net new single detached houses (+8,425) in the CMA. A similar trend was observed in Vancouver, with 6,245 net new row houses and a net reduction in single detached homes of 3,680. However, while population and housing stock growth are indicators of supply and demand, they are not the sole determinants of housing prices in these CMAs. Other factors such as income, macroeconomic conditions, and pre-existing shortages in housing supply also play an important role.

      Learn more:

        A roadmap for fixing the affordable housing crisis

        We have an affordable housing crisis in Canada – particularly in Ontario and B.C. — that’s putting people on the streets and/or forcing them to live in inadequate or even dangerous housing.  

        Unfortunately, because this crisis is caused by several complex, interrelated factors, it can’t be solved with a single, magic bullet.  

        We need to attack it on four fronts using an approach that can be summed up with the acronym “CARS,” standing for Construction; Acquisition; Retention; Supports. 

        Construction: 

        We need to build as much affordable housing as we can, and fast. To do that, we must overcome barriers, including a lack of organizational capacity, a complex and slow municipal approval process, and the availability of land.  

         

        solutions to the housing crisis

        Solutions to the housing crisis

        Acquisition: 

        As a result of financialization and renoviction, the last several years have seen an acceleration in the loss of affordable market rental housing. Private capital firms, including Real Estate Investment Trusts (REITs), seek buildings where rents are below market. As tenants leave (either forcibly or by attrition), buildings are upgraded to justify higher rents. This kind of activity is made possible by rent de-controls, where rent is only regulated so long as the same tenant stays in a unit. Once a tenant leaves, the landlord can seek whatever rent the market will bear. 

        Community groups need to take advantage of the federal government’s Rapid Housing Initiative which helps the non-market sector quickly acquire funding for purchasing buildings from the private sector.  Another stream of acquisition could focus on affordable home ownership.  

         

        Retention: 
        It is important that tenants who are in affordable units under rent controls have the ability to stay. Once they leave, the unit may be lost as affordable housing. Above-guideline rent increases, eviction and low income are the main reasons tenants lose their affordable units. There are several programs supporting tenants with these issues, but they should also be increased.  

         

        Supports: 

        Many people who need affordable housing also need more human service supports. A tactical roadmap should address the need for supportive housing for the following priority groups: 

          • People with severe mental illness, addictions and other people who are high acuity and at-risk for homelessness, or who are homeless. Demonstration projects have showed that supportive housing for high-needs clients costs less than the costs avoided in other sectors, notably policing and criminal justice, acute care services, emergency response and social services.
          • Older adults, particularly low-income older adults. A Canadian Institute of Health Information (CIHI) study showed that 1 in 9 people going into LTC didn’t require that level of care (clinically). LTC is being used as affordable housing for people who could otherwise live in the community with supports.
          • People with developmental disabilities suffer from a severe shortage of supportive housing.
          • Women, LGBTQ+ have a significant need for customized supportive housing.

        Using CARS, we can make significant gains toward resolving the housing crisis and in a way that prioritizes those most in need.