Cheap money, shortages, investors and crime: The making of Canada’s housing crisis


In what promises to be a fiercely fought federal election, a bipartisan consensus has emerged on at least one top political issue: there is a “housing crisis” in Canada.

The Liberal, Conservative and New Democratic Party leaders have all used those words to describe the mind-boggling home prices and dearth of quality rental options that have come to characterize the country’s real estate. The Green Party has similarly called for affordable housing for all Canadians.

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Breakneck price appreciation, once a problem limited largely to areas around Vancouver and Toronto, has become a national emergency during the pandemic, with Canada’s average home price rising by more than 30 per cent between July 2019 and July 2021, according to data from the Canadian Real Estate Association.

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At the same time, COVID-19 has also brought renewed attention to the issue of renting. On the one hand, eviction threats during provincial stay-at-home orders have highlighted the plight of low-income renters, many of whom were disproportionately affected by job losses in the earlier phases of the pandemic. On the other hand, the quality and affordability of rental options is increasingly becoming a middle-class issue as well, as a growing number of prospective homebuyers feel permanently locked out of homeownership.

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The front-runners are all going big with promises to tackle the crisis. Liberal Leader Justin Trudeau unveiled a pledge on Tuesday to build or renovate 1.4 million homes in four years. Conservative Leader Erin O’Toole has promised one million new houses in three years, while NDP Leader Jagmeet Singh wants to build 500,000 affordable homes in 10 years. And that’s just a taste of the many policy proposals each party has put forth on housing so far.

But how did Canada’s crippling housing woes come to be in the first place?

While there is no single or simple explanation, here’s a look at some of the main factors experts point to when explaining the country’s housing crisis.

Click to play video: 'NDP vows to make housing more affordable in Canada'

NDP vows to make housing more affordable in Canada

NDP vows to make housing more affordable in Canada

Low mortgage rates

Economists have long pointed to low interest rates as an important factor behind Canada’s home-price boom.

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Mortgage rates for well-qualified borrowers have been in the low single digits for more than a decade, a far cry from the double-digit rates Canadians used to pay on mortgages in the 1980s and early 1990s.

Low interest rates have allowed Canadians to take on ever-larger mortgages and thus afford pricier homes. The amount of mortgage debt Canadians collectively owe stood at 1.7 trillion in September 2020, according to the latest seasonally adjusted data from the Bank of Canada. That’s up from around $1 trillion in mortgage debt a decade ago.

While mortgage rates were already low before the pandemic, they dropped even further after the onset of the health emergency, as the Bank of Canada used a variety of tools to lower borrowing costs and stimulate economic activity to soften the impact of COVID-19.

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Among other measures, Canada’s central bank has left its key interest rate at a historic low of 0.25 per cent since March 2020. Movements in the Bank of Canada’s trend-setting interest rate directly impact variable-rate mortgages.

But changes in the central bank’s rate can also affect the interest on new fixed-rate mortgages, especially if there’s a widespread expectation that the changes will be long-lasting.

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The Bank of Canada has repeatedly flagged high levels of household debt amid the housing craze as a concern. But it does not have a mandate to limit how much Canadians borrow or to keep housing affordable. Instead, the central bank influences interest rates with the goal of keeping inflation low and stable, an objective it pursues with considerable independence from the government.

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With economic activity now picking up steam and inflation on the rise, several analysts believe the Bank of Canada will start raising its key interest rate sometime in the second half of 2022.

Higher interest rates are widely expected to put a damper on the housing market, CIBC economist Benjamin Tal has previously told Global News.

“Even a small increase in interest rates would be sufficient to slow down the market,” Tal said.

Click to play video: 'Canada election: Conservatives pledge to build 1 million affordable homes in 3 years if elected'

Canada election: Conservatives pledge to build 1 million affordable homes in 3 years if elected

Canada election: Conservatives pledge to build 1 million affordable homes in 3 years if elected

Canada isn’t building enough homes

Many analysts and industry insiders also point to another problem to explain skyrocketing home prices: there aren’t enough homes for everyone who wants to own or rent one.

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Canada’s housing supply hasn’t kept pace with population growth, several experts say.

While national borders have been closed to most immigrants since March 2020 to limit the spread of COVID-19, between 2016 and 2019, Canada welcomed nearly one million new permanent residents, data from Immigration, Refugees and Citizenship Canada (IRCC) show. And between 2017 and 2018, net immigration accounted for 80 per cent of the country’s population growth, according to IRCC.

That increase likely helped fuel housing demand during the pandemic, Sri Thanabalasingam, senior economist at TD Bank Group, previously told Global News. Lower mortgage rates and a sudden desire for more living space amid the pandemic restrictions triggered what Thanabalasingam calls a “pull-forward” of housing demand, prompting many prospective homebuyers to pull the trigger on a purchase.

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Soaring numbers of international student enrolment are also feeding into the demand for housing. In 2019 alone, Canada issued more than 402,000 new study permits, according to IRCC.

And a significant number of those students ends up settling here for the long-term, thanks to Canada’s easy path to permanent residency, economist Mike Moffatt has told Global News.

Southern Ontario is a striking example of the housing shortage. The population of the Greater Golden Horseshoe region, which stretches around Toronto and the western end of Lake Ontario, is estimated to have grown by 780,000 people in the five-year period between the second half of 2016 and the first half of 2021, according to an analysis by Hemson Consulting. That represents an increase of more than 50 per cent compared to the 510,000 people the area added in the previous five-year period, the data shows.

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But in the same five-year span between 2016 and 2021, the region likely added only around 270,000 new homes, a modest increase from around 214,000 homes added in the previous five years, estimates Russell Mathew, partner at Hemson Consulting, which crunches the numbers for Ontario’s Minister of Municipal Affairs and Housing.

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Priced out: Will the Canadian housing market crash? Why home prices may stay hot

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And when it comes to housing, generations matter, too. Housing demand is linked not just to the number of people who need a roof over their heads but also to the number of those reaching the prime family-formation and home-buying stage.

The largest number of millennials in Canada is turning 30 in 2021, Mathew notes.

“So what are they doing as they turn 30? Well, this is where they’re starting to pair up, thinking of having kids and, you know, maybe buying a house in the suburbs,” he says.

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Canada’s rental supply has also been suffering from chronic shortages. The national rental vacancy rate in 2020 was a mere 3.2 per cent and as low as two per cent in 2019, according to the Canada Mortgage and Housing Corporation.

Some blame the rental shortage on rent control policies that, they say, make it less profitable for corporations to build new rentals and discourage landlords from spending on repairs and upgrades.

Others, though, link the dearth of affordable rental options to regulations that favour condos, rather than purpose-built rentals, in areas designed for high-density development.

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For the first couple of decades after the Second World War, all urban areas designated for the construction of high-density housing tended to be, by default, reserved for rental units, David Hulchanski, professor of housing and community development at the University of Toronto, has previously told Global News.

But with provincial regulations introducing the condominium form of homeownership in the early 1970s, condos became competition for purpose rental housing in those same high-density areas, Hulchanski said. And, over time, condos edged out rentals.

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Also, whether young Canadians are buying or renting, another aspect of the housing shortage is the scarcity of housing options fit for families. Some argue that Canada is not only not building enough homes but not building enough of the right kind of homes.

This is the so-called “missing middle” issue. Canada’s urban development, some housing experts say, is often split between large and expensive detached homes or tiny apartments in high-density units with few options for families with middling incomes.

It doesn’t help that the baby boomer generation seems increasingly inclined to age in place instead of downsizing, which would free up larger homes for growing families.

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Priced Out: A look at why the hot housing market is out of reach for young Canadians

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Using homes as an investment

Another hot topic when it comes to housing is the issue of using residential real estate as an investment rather than a place to live.

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The idea, of course, isn’t new. Owning and renting a second property, for example, has long been a way for Canadians to generate income and grow their money. But a number of housing market watchers say aspects of real estate investing have become problematic.

Soaring home appreciation makes housing an attractive place to put money, especially when low interest rates mean there are few options for investors to grow their capital without taking on considerable risk.

Investors accounted for 20 per cent of property purchases in Canada in early 2021 compared to just under 22 per cent of purchases in early 2018 and 18 per cent of purchases in early 2015, according to estimates from the Bank of Canada.

One worry is that investors can help feed the collective psychological frenzy that often sets in when home prices start to rise rapidly, pushing home values even further.

Another concern is about investors leaving homes empty or turning them into short-term rentals, which reduces the supply of housing available for Canadians to live in.

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Priced out: Renters facing challenges during a red-hot pandemic housing market

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For example, when Andy Yan, director of Simon Fraser University’s City Program, analyzed 2016 census data, he found that Metro Vancouver had more than 65,000 homes that were either lying empty or occupied for only a short period of the year, more than double the number of empty homes in 2001.

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Vancouver’s empty-homes tax has since prompted some homeowners to rent out their properties, but around five per cent of the city’s homes are still vacant, Yan says.

It’s also unclear how many of the properties that have joined the city’s rental stock are being made available to long-term renters rather than added to the pool of homes for short-term rentals, he adds.

Online platforms like Airbnb have also exacerbated the housing shortage in some of Canada’s hottest markets, some housing analysts say. A 2019 study by McGill University researchers, for example, estimated that Airbnb had reduced Canada’s long-term rental stock by 31,000 homes, with nearly half of active listings located in Montreal, Toronto and Vancouver. Several jurisdictions have since tightened regulations on short-term rentals.

But some say an oversized investor presence in the housing market can be a concern even when investors rent out their properties for the long-term.

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One source of concern is the growing presence of corporate investors like private equity firms, real estate investment trusts (REITs) and financial institutions in Canada’s multi-family apartment rental sector.

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Martine August, a professor at the School of Planning at the University of Waterloo, previously told Global News that large corporate landlords have a track record of “systematically” pursuing rent increases in order to extract profit from their real estate investments.

And while small landlords are also usually motivated by financial gain, large corporations are more effective at finding ways to increase rents, according to August.

“They typically have a very sophisticated way to try to extract more value,” August says.

“(They) will invest in all sorts of things in those buildings that will allow them to extract more value from it — the types of building renovations that allow them to charge more rents, (or) above-guideline increases.”

In general, the overarching concern is that the secondary rental market — homes built for ownership but then made available for rent — comes with less security of tenure and higher rents than the purpose-built rental market, says Yan.

“Part of (the) challenge is really understanding how the secondary rental market plays a role in the rental system,” he says.

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Your Money: What to expect as bidding wars heat up the housing rental market

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Using homes to launder dirty money

Yet another factor exacerbating Canada’s housing crisis is money laundering, some analyses suggest.

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The Expert Panel on Money Laundering in B.C. Real Estate, for example, estimated that money laundering makes home prices in the province between 3.7 per cent and 7.5 per cent higher than they would otherwise be.

But money laundering in real estate has also emerged as a serious concern in Toronto, Montreal and other parts of the country.

Real estate lends itself well to money laundering, says James Cohen, executive director of Transparency International Canada. For one, real estate purchases are a way to launder large sums of dirty money. And when real estate goes up in value, it becomes an even better deal for criminals, Cohen adds.

“You can enjoy that money for a while by actually visiting that (home) and then you can see the property price go up, sell it, and now you’ve got legitimate cash,” he says.

Organized crime across the world uses real estate to launder money, but Canada’s pristine international reputation and lax anti-money laundering regime have made it an especially attractive destination for crooks looking for a place to park their funds, Cohen says.

“Opaque ownership” is the number one issue facilitating money laundering in Canada’s real estate, according to Transparency International. Using shell companies, trusts or “straw men” to hold title to property is an easy way for criminals to hide ownership from law enforcement and other authorities.

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While financial institutions have an obligation to verify who they’re really doing business with, it wasn’t until June of this year that Canada introduced similar requirements to others including real estate agents, brokers and developers.

Loose reporting requirements for the real estate industry made it easy for criminals to use all-cash transactions to evade scrutiny, Cohen says.

But even with stricter rules in place, it can often be difficult for private-sector entities to assess who really owns what, he adds.

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When it comes to housing, Transparency International and other anti-money-laundering advocates have long called for federal, provincial, and territorial governments to require disclosure of beneficial owners as a prerequisite for any property or land transfer and create a pan-Canadian, publicly available beneficial ownership registry.

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In 2019, British Columbia created a publicly searchable registry of information about beneficial ownership of land in the province. Quebec, meanwhile, now requires beneficial ownership to be reported in its existing corporate registry.

In its 2021 federal budget, the Liberal government announced $2.1 million to support the creation of a public corporate beneficial ownership registry by 2025.

Still, even with a centralized, comprehensive registry in place, Canada will need to devote more staff, money and training to detect suspicious transactions and hold those responsible accountable, Cohen says.

“Money laundering and financial crime is a very technical area that takes years of experience to be able to enforce,” he says.

It’s little wonder that the ongoing work of B.C.’s Cullen Commission, which was established to determine how to tackle money laundering in the province, earned several mentions on the federal campaign trail.

Ottawa should listen carefully to the Commission’s final recommendations, which are expected later this year, Cohen says.

“You can’t just address money laundering province by province. It’s a national issue.”

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