The Thursday Question 2:42: Should house prices decline?
Following up on a Twitter argument
Last week, Canada’s new housing minister, Gregor Robertson, refused to say that Canada’s housing prices should go down. His comments generated some blowback, including from The Globe and Mail. I defended that part of his remarks on the site that will forever be known as Twitter and got “hey Boomer”ed for my trouble. (1) My critics argued that housing prices must go down if houses are to become affordable. They pointed to the generational divide between those who own and those who don’t, suggesting I was being selfish (although I do not own real estate myself). A few argued there is a housing bubble that must eventually pop. One anonymous account that recently joined Twitter and I therefore assume to be a foreign influence operation chimed in that prices need to be halved for Canada to have a future, sucks for those who already own.
I know that housing prices are unaffordable for an awful lot of Canadians. I know that governments have helped to drive up prices. I know that local governments suppressed supply and the federal government juiced demand with immigration. I also know that these policies are small ball compared to the impact of loose monetary conditions on asset prices, a point that Pierre Poilievre has made forcefully and often. We have ended up in a bad and deeply unfair situation. We are becoming a society with a landed class and a landless class.
But solving this problem will not be easy.
First, there is the political economy of high housing prices. A family that pays $1 million for a home and borrows $800,000 to finance it inevitably shudders at any suggestion the house should only be worth $750,000. Turning a $200,000 asset into a $50,000 shortfall sets back household wealth. It can impact their retirement plans, or saving for education, or the ability to finance a small business. And it gives them an incentive to vote for the party that promises to preserve the value of their asset against a party that promises to turn it into a liability.
Secondly, the assumption that housing prices can only go up has been born out for long enough that many Canadians see housing as an investment vehicle. Mrs. Poilievre is one of them. I am not qualified to give investment advice to anyone, but even if I do wonder about putting too much of your life savings into a single asset, reversing the assumption of housing inflation is going to be painful to a lot of Canadians.
And thirdly, if millions of families have an $800,000 mortgage against a $1 million house, then reducing the value of their house to $750,000 creates a multi-billion problem for the holders of those mortgages. When the US financial system toppled over in the face of sudden drops in real estate values, the governments of the G20 had to step in to stop a global financial crisis from spreading. Among other responses, they created a global Financial Stability Board. I imagine that the second chair of the FSB learned the lesson about the systemic risk of declining home prices quite well.
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I must have learned something about class politics from reading Karl Marx. I had to read Marx for my undergrad course in Canadian Political Process. It was taught by sessional instructor who was an enthusiast for many varieties of Marxism. Since he was a good teacher, he made me think hard about class politics. Still, I think there are better lessons about class and politics in James Madison, the great political scientist and former US president.
Read “The Federalist 10”, one of his anonymous contributions to the 1787 debate about ratifying the US Constitution. In the essay, he notes that “Those who hold and those who are without property have ever formed distinct interests in society… A landed interest … grow[s] up of necessity in civilized nations, and divide them into different classes, [each] actuated by different sentiments and views.” As more detailed studies of the recent Canadian election come out, I suspect we will find out how much this dynamic was at work on election day. Naturally, those who own and those who do not own houses are “distinct interests” in Canada and divide voters into two classes, each driven by “sentiments and views” formed by their class.
And it is also natural, Madison writes, for these sentiments and views to be expressed in politics. After all, “The regulation of these various and interfering interests forms the principal task of modern legislation…”
Madison goes on to warn about the impact of political debates driven by divisions like the one between landed and unlanded interests. He worries that legislators who have to make decisions on property matters will also be tied to one side or the other of the interested divide. “No man,” he writes, meaning both sexes I think, “is allowed to be a judge in his own case, because his interest would certainly bias his judgement, and, not improbably, corrupt his integrity.” But does this mean that once he returns to the House of Commons Mr. Poilievre is blocked from voting on housing matters because of his wife’s investment? No. The public’s representatives must decide matters of the public agenda. And the result? “[T]he most numerous party, or, in other words, the most powerful faction must be expected to prevail.”
In Canada, at least at the moment, homeowners seem to outnumber those trying to buy homes. A party that stands only for the latter is doomed to lose for the foreseeable future. Or, as Madison puts it: “The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is ... no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets. It is in vain to say that enlightened statesmen will be able to adjust [i.e.., reconcile] these clashing interests and render them all subservient to the public good. Enlightened statesmen will not always be at the helm.”
Does this mean democratic government will always be a tyranny of the majority? Madison thinks not. His argument in The Federalist suggests ways a government can be structured to avoid such tyrannies. A full treatment of his thinking is beyond the scope of a simple newsletter. Readers are welcome to register the next time I teach POLI 477: American Politics. I start with a deep dive on Madisonian constitutionalism.
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Housing affordability is not just a matter of prices. A family’s wealth also matters. In principle, when incomes grow faster than prices houses become more affordable. My colleague Mike Moffat, head of the Missing Middle Initiative and a former advisor to the Trudeau government, calculates that it would take decades for rising incomes to make housing affordable again in some parts of Canada. I am sure he is correct.
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So, let’s say the Carney government makes little headway in improving the affordability of housing in the four or five years between now and the next federal election (see The Thursday Question 2:40 for my analysis of the timing). What then?
Conservatives will have to be careful about their housing promises. Simply promising to cut house prices is risky. If the 2025 election polarized voters along property lines, then Conservatives can only grow their vote by winning over some property-owners. Promising to tank the value of housing investments would be foolish.
But then again, Mr. Poilievre didn’t actually promise lower house prices, did he? He promised to “Build the Houses” by strongly encouraging municipalities to lift zoning and other restrictions. And he promised “Powerful Paycheques” by focusing on the economically valuable things we already do and growing the economy. That could increase family incomes more quickly than Moffat assumes and return us to housing affordability earlier.
(1) For the record, I am 57. Gen-X, not a Boomer.