The three tiers of government should collaborate to address the chronic undersupply of housing
Author of the article:
Murtaza Haider and Stephen Moranis, Special to Financial Post
Residential construction in Canada has not kept pace with the population over the past five decades.Photo by Luke Sharrett/Bloomberg files
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The rapid escalation of housing prices in the middle of a pandemic has alarmed many and so, not surprisingly, the calls for governments to act are getting louder.
A buffet of interventions, from eliminating the exemption on proceeds from the sale of a principal residence to the tightening of mortgage regulations, has started to surface.
Of course, the proper way to cool housing prices depends upon an informed prognosis of market conditions. Is the rapid increase in prices driven by market fundamentals, or is it a result of speculative bidding in a market where “animal spirits” are running loose?
Interest rates in Canada have steadily declined over the past two decades and that has put mortgage rates at historic lows, which can have two direct consequences. First, ultra-low mortgage rates reduce the borrowing costs for homebuyers such that their monthly mortgage payments are considerably reduced. Second, they cause upward pressure on pricing because these monthly mortgage payments are less affected by increasing prices than they would be at higher interest rates.
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Given the current circumstances, prospective homebuyers have two rational responses: Leave money (cheap debt) on the table and wait for a future where prices might be lower, but interest rates will be higher; or buy now to take advantage of the low interest rates.
Even if monthly mortgage payments are similar in high and low interest rate scenarios, a household’s long-term finances are impacted differently because a monthly mortgage instalment has two components: interest and principal.
With a high mortgage rate of five per cent or more, the interest component could consume more than two-thirds of the first monthly instalment, while the rest is dedicated to reducing the principal owed.
The balance between interest and principal reverses at lower interest rates. At a mortgage rate of, say, two per cent, the principal paid could account for two-thirds or more of the monthly instalment, and the interest accounts for the rest of the payment.
Will Dunning, a veteran housing economist, believes housing affordability has been improving over the past 15 years because homeowners can save more when principal payments account for a large share of the monthly instalment.
But although low interest rates improve affordability, some believe the recent rapid increase in prices is also a sign of irrational exuberance.
Sal Guatieri, a senior economist and director at BMO Capital Markets, said market fundamentals drive housing prices and demand. More buyers and fewer sellers have created a situation where prices have appreciated faster.
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Potential buyers can make two assumptions about the future when housing prices rapidly rise. They may believe that prices will continue to grow, and so the rational response will be to buy now rather than later. Or they may assume that the so-called bubble will burst soon, and they may stay on the sidelines waiting for favourable buying conditions.
As housing prices climb, many point to metrics such as the housing price-to-income ratio, which suggests a worsening of housing affordability. But the price-to-income ratio would only matter if homebuyers were paying the full price in cash. Most homebuyers borrow money to finance a house purchase. Therefore, the share of income consumed by housing costs might be a better metric to gauge affordability.
Either way, the unintended consequences of government interventions can often have lasting impacts. In the early 1970s, the federal government implemented the capital gains tax on the Carter Commission’s advice. An unintended and immediate consequence was the precipitous decline in the construction of purpose-built rental housing. More than four decades later, rental housing construction has never achieved the same heights as in the early 1970s.
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The same holds true for the supply of housing in general. In the 1970s, when the Canadian population was much lower than where it is today, far more housing was built. Since the mid-1970s, however, housing construction has been comparatively lower, even though the population has continued to increase.
If governments feel tempted to act, they should finally realize that residential construction in Canada has not kept pace with the population over the past five decades. Rather than hurt existing homeowners and current homebuyers with knee-jerk regulations, the three tiers of government should collaborate to address the chronic undersupply of housing.
Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin websitehmbulletin.com.
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Tesla has promised to start selling cheaper models next year, days after a Reuters report revealed that the company had shelved its plans for an all-new Tesla that would cost only $25,000.
The news that Tesla was scrapping the Model 2 came amid a drop in sales and profits, and a decision to slash a tenth of the company’s global workforce. Reuters also noted increased competition from Chinese EV makers.
Tesla’s deliveries slumped in the first quarter for the first annual drop since the start of the pandemic in 2020, missing analyst forecasts by a mile in a sign that even price cuts haven’t been able to stave off an increasingly heated competition on the EV market.
Profits dropped by 50%, disappointing investors and leading to a slump in the company’s share prices, which made any good news urgently needed. Tesla delivered: it said it would bring forward the date for the release of new, lower-cost models. These would be produced on its existing platform and rolled out in the second half of 2025, per the BBC.
Reuters cited the company as warning that this change of plans could “result in achieving less cost reduction than previously expected,” however. This suggests the price tag of the new models is unlikely to be as small as the $25,000 promised for the Model 2.
The decision is based on a substantially reduced risk appetite in Tesla’s management, likely affected by the recent financial results and the intensifying competition with Chinese EV makers. Shelving the Model 2 and opting instead for cars to be produced on existing manufacturing lines is the safer move in these “uncertain times”, per the company.
Tesla is also cutting prices, as many other EV makers are doing amid a palpable decline in sales in key markets such as Europe, where the phaseout of subsidies has hit demand for EVs seriously. The cut is of about $2,000 on all models that Tesla currently sells.
Divisions within the Bank of Canada over the timing of a much-anticipated cut to its key overnight interest rate stem from concerns of some members of the central bank’s governing council that progress on taming inflation could stall in the face of stronger domestic demand — or even pick up again in the event of “new surprises.”
“Some members emphasized that, with the economy performing well, the risk had diminished that restrictive monetary policy would slow the economy more than necessary to return inflation to target,” according to a summary of deliberations for the April 10 rate decision that were published Wednesday. “They felt more reassurance was needed to reduce the risk that the downward progress on core inflation would stall, and to avoid jeopardizing the progress made thus far.”
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Others argued that there were additional risks from keeping monetary policy too tight in light of progress already made to tame inflation, which had come down “significantly” across most goods and services.
Some pointed out that the distribution of inflation rates across components of the consumer price index had approached normal, despite outsized price increases and decreases in certain components.
“Coupled with indicators that the economy was in excess supply and with a base case projection showing the output gap starting to close only next year, they felt there was a risk of keeping monetary policy more restrictive than needed.”
In the end, though, the central bankers agreed to hold the rate at five per cent because inflation remained too high and there were still upside risks to the outlook, albeit “less acute” than in the past couple of years.
Despite the “diversity of views” about when conditions will warrant cutting the interest rate, central bank officials agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target, according to the summary of deliberations.
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They considered a number of potential risks to the outlook for economic growth and inflation, including housing and immigration, according to summary of deliberations.
The central bankers discussed the risk that housing market activity could accelerate and further boost shelter prices and acknowledged that easing monetary policy could increase the likelihood of this risk materializing. They concluded that their focus on measures such as CPI-trim, which strips out extreme movements in price changes, allowed them to effectively look through mortgage interest costs while capturing other shelter prices such as rent that are more reflective of supply and demand in housing.
They also agreed to keep a close eye on immigration in the coming quarters due to uncertainty around recent announcements by the federal government.
“The projection incorporated continued strong population growth in the first half of 2024 followed by much softer growth, in line with the federal government’s target for reducing the share of non-permanent residents,” the summary said. “But details of how these plans will be implemented had not been announced. Governing council recognized that there was some uncertainty about future population growth and agreed it would be important to update the population forecast each quarter.”
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Shares in US tech giant Meta have sunk in US after-hours trading despite better-than-expected earnings.
The Facebook and Instagram owner said expenses would be higher this year as it spends heavily on artificial intelligence (AI).
Its shares fell more than 15% after it said it expected to spend billions of dollars more than it had previously predicted in 2024.
Meta has been updating its ad-buying products with AI tools to boost earnings growth.
It has also been introducing more AI features on its social media platforms such as chat assistants.
The firm said it now expected to spend between $35bn and $40bn, (£28bn-32bn) in 2024, up from an earlier prediction of $30-$37bn.
Its shares fell despite it beating expectations on its earnings.
First quarter revenue rose 27% to $36.46bn, while analysts had expected earnings of $36.16bn.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said its spending plans were “aggressive”.
She said Meta’s “substantial investment” in AI has helped it get people to spend time on its platforms, so advertisers are willing to spend more money “in a time when digital advertising uncertainty remains rife”.
More than 50 countries are due to have elections this year, she said, “which hugely increases uncertainty” and can spook advertisers.
She added that Meta’s “fortunes are probably also being bolstered by TikTok’s uncertain future in the US”.
Meta’s rival has said it will fight an “unconstitutional” law that could result in TikTok being sold or banned in the US.
President Biden has signed into law a bill which gives the social media platform’s Chinese owner, ByteDance, nine months to sell off the app or it will be blocked in the US.
Ms Lund-Yates said that “looking further ahead, the biggest risk [for Meta] remains regulatory”.
Last year, Meta was fined €1.2bn (£1bn) by Ireland’s data authorities for mishandling people’s data when transferring it between Europe and the US.
And in February of this year, Meta chief executive Mark Zuckerberg faced blistering criticism from US lawmakers and was pushed to apologise to families of victims of child sexual exploitation.
Ms Lund-Yates added that the firm has “more than enough resources to throw at legal challenges, but that doesn’t rule out the risks of ups and downs in market sentiment”.
