Home ownership in Canada was never really a good investment until you considered the alternatives to housing and saving.
A panel hosted by the Veritas Group of Companies titled “Is Home Ownership Dead?” I debated the topic passionately last week, and the conclusions seem bleak. Rightly so. Confidence in housing is rapidly declining for young Canadians, but that doesn't necessarily mean the end of home ownership.
“Canadian homeownership was like a rite of passage,” said Veritas CEO Anthony Scilipoti, who hosted the event in Toronto. And while the national homeownership rate peaked at 69 per cent in 2011, it has since fallen to 66.5 per cent, with the decline more pronounced among younger Canadians. The direction seems clear.
There is no doubt that the trend was driven by affordability. Rents are historically high but falling, and ownership appears to be a worse option, especially in a market that has just experienced a 20 percent price correction.
The correction comes after a price surge during the pandemic, which followed about two decades of speculation-driven price increases.
Daniel Foch, chief real estate officer at Valery.ca, said homeownership isn't dead, “but it's on the right track.”
Is that a bad thing? Foch doesn't think so, pointing out that he is a Swiss citizen and that his friends who work in the country's finance sector like to rent.
“They have much higher net worth than any of my friends in Canada, and that's because they've done more productive things with their capital,” Foch said.
However, his example assumes that Canadians are ready to become disciplined investors. Spoiler alert: most of them aren't.
Forced savings through mortgage payments has long been the formula for wealth creation in Canada.
It's not about outperforming the S&P/TSX composite index, which has grown by around 85 percent over the last five years. The point is that the money doesn't burn a hole in your pocket.
“Homeownership has done a great job of building wealth because Canadians are generally good at saving money but not good at investing,” Foch said. “I think if we can change that, we could have a much better economy.”
He's right, but I wouldn't bet on it. Canada is a conservative country when it comes to doing things differently.
Apparently, it's not just homeowners who view their properties as investments that are driving the market.
John Pasalis of Realosophy Realty found that the number of homes owned by investors is growing three times as fast as the overall housing inventory.
“We basically just build non-market or social housing,” he said, adding that much of the private stock is bought up as investment properties and converted into rental housing.
I am suspicious of the argument that the financialization of housing is the bogeyman. After all, during the financial crisis in the United States, no one seemed too upset when corporate buyers flocked to snap up unsold homes. The anger came after these corporate buyers made the company profitable.
When the tide turns here and investors absorb the surplus condo holdings of cash-strapped speculators and start making money, the narrative will change again.
The problem is not investor interest, but rather that the focus has been too much on capital appreciation rather than income. That's a bad recipe for any real estate market, especially when supply can't keep up.
We need capital to build houses. We cannot fix the supply side of the market without private money stepping in. So why do we denigrate it?
Pasalis, for his part, made this dire prediction: “Greed is not dead. It just lingers on the sidelines,” warning that investors would return and outbid end consumers, leaving the next generation further behind.
Alex Avery, Chairman of Primaris REIT and author of “The Wealthy Renter,” reminded the audience that the primary purpose of housing is accommodation, not speculation.
“At some point in the last 25 years it became a speculative asset,” he said. “That was politically motivated.”
He's not wrong. By through Canada Mortgage and Housing Corp. from backed mortgages with five per cent down payment programs to policies that allow Canadians to steal their retirement savings for down payments – public policies have spurred homeownership while encouraging price appreciation.
Today we have a system seemingly designed to lure people into illiquid, costly investments based on the assumption that these homes will ultimately fund their retirement.
But in the absence of reasonable alternatives, it will likely continue to dominate.
“The frame is broken,” said Foch. “We need to think about it. People need to understand that they can build wealth as renters.”
Theoretically yes. In practice I'm not so sure. For this to work, we first need access to better rental options. An important reason for owning a home is the rental guarantee.
Please find me a rental property with a backyard and suitable rooms for raising children. Public sentiment today is focused on preventing companies from buying these properties rather than building more of them for rental.
To be successful as a renter, Canadians also need stronger financial literacy. Most renters do not invest their savings in broad-based exchange-traded funds.
Yes, just trying to cover the rising cost of living doesn't leave much, but what it saves could be invested.
Home ownership is here to stay, not because it is perfect, but because it is a model that Canadians have been told will help build wealth and secure long-term residence.
It is true that we are experiencing a long overdue boom in purpose-built rental housing, some of which is aimed at families. This is good policy. But it is also decades overdue.
Ron Butler, an outspoken mortgage broker, noted that while renting is common in other parts of the world, it is typically a choice and not something forced on people who are deprived of the purchase price, such as in Canada.
We gave tenants no real choice. We designed a system that rewards homeowners with leverage, tax-free capital gains, and political support. Until that changes, ownership will remain as there is no better alternative.
Avery is right that your primary residence is a poor investment. It is illiquid, has high transaction costs and results in negative equity when taking into account mortgage insurance and exit fees such as property transfer taxes.
“In the public markets, (regulators) would certainly make you an accredited investor,” Avery said with a laugh about investing in a very speculative real estate market.
The problem is that it is the only, albeit imperfect, investment that Canadians were willing to make and are sticking with.
And that's why, for all its flaws, home ownership isn't dead. Not even close.
• Email: gmarr@postmedia.com