What caused the housing crisis?

 

What caused it?

Why So Expensive?

Solutions?

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.

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