The Canadian property bubble was recognized by an unlikely entity — the Canadian government. MP Adam Vaughan dropped the b word this week. Vaughan isn’t just an elected official, but also the Secretary to the Minister in charge of most of the country’s housing policy. In a Twitter exchange, he explained how difficult it’s been to let some air out of the market. He also acknowledged current cooling measures failed to be effective.
The Canadian Property Bubble Is Finally Acknowledged
Few people in charge have openly called Canadian real estate a bubble, but it happened today. In an exchange, Vaughan said, “Getting the air out of the bubble without an explosion has been tried several ways.. the stress test, increase supply, speculation tax, etc… each time the market only slows to take off again… and the other challenge is that a drop in market prices might also unleash pent up demand.”
First, let’s not overreact whether you think he’s right or wrong about using the term. Let’s unpack the perspective he’s generously offering to the public. First, he is acknowledging the issue with home prices. It doesn’t matter if you think prices will rise or fall.
Home prices in cities like Toronto and Vancouver are largely out of reach for those under 40. This inevitably leads to major demographic and employment issues. If left unresolved, those turn into liquidity issues. Property is only worth what you can sell it for, and if there are few people to buy it — who do you sell it to? It’s actually great to see a government recognize this is a bubble.
Cooling Measures Have Been Ineffective, Because… Well, It’s a Bubble
More important is the list of measures implemented, that have failed to cool markets. Stress tests, supply, speculation taxes, etc. — they didn’t drop prices. In his words, the market “only slows to take off again.” This is often thought of as market resilience, however it’s just as much a sign of market toxicity.
Few, if any, markets have been corrected using transactional taxes or by increasing supply. Prices may have fallen briefly, but if there’s nowhere else for money to go, there’s nowhere else. If property values are rising 30 points in a year, one or two point taxes are going to have little impact.
Increasing supply sounds like it works, until you think about it for a second. If people actually thought building more new homes would lower prices, why buy them? No one buys something they think will fall in value. It doesn’t even make sense on the surface.
Then there’s the fact that increasing building in itself is subject to supply and demand. The more housing that’s built, the more demand for materials and labor. As that demand rises, so does input costs. Whaaat? Supply and demand applies to other parts of housing other than the final product? Who would have thought?
Anyway, it’s official. A Canadian politician that’s actually in charge used the term bubble. Now what?
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