MNI INTERVIEW: Canada Condo Dip Seen On Migrant Turn-Adviser
University of Toronto professor Nathaniel Baum-Snow talks to MNI about Canada's housing market risks.
Condo markets in Toronto and other Canadian cities could swing from boom to weakness as rising supply potentially coincides with curbs on the immigration fueling demand in one of the world's most overheated markets, a government adviser told MNI.
“There are risks there, no question,” said Nathaniel Baum-Snow, a University of Toronto professor and the Premier's Research Chair in Productivity and Competitiveness, who has presented some of his research at a Bank of Canada workshop.
“You look at the Toronto market, a lot of new condo construction still in the pipeline and yet the condo market has been kind of the weakest part of the market the past few years,” he said. “There is the wild card of immigration policy of course, which a future government could change, and which in my mind would be the biggest source of uncertainty about what might cause demand to change.”
Governing Liberals are unwinding the fastest immigration in at least half a century amid signs new arrivals are further driving up housing prices. Governments of all stripes also support boosting supply and in particular urban density.
MOVE TO WINNIPEG
Toronto's condo market was also in focus during Canada's last major correction into the early 1990s, and Baum-Snow said a supply imbalance is again a main risk rather than the jump in borrowing costs or underwriting weakness seen before the 2008 crash. The BOC hiked 10 times to the highest since 2001 before a cut last week, and its annual financial system review in May said households and financial institutions have been resilient even as some families refinance at sharply higher borrowing costs. (See: MNI INTERVIEW: Canada Housing Agency Sees Resale Price Boom)
“We haven’t had a crash yet, it could still happen, it can always happen, but we’ve been through the cycle of rising rates and the Bank of Canada is now easing off a bit, and it seems like there isn’t too much worry,” Baum-Snow said. “It’s a lot of supply coming online and there is some I think legitimate wondering about whether the demand conditions are going to be strong enough to keep prices stable in the condo segments.”
Prime Minister Justin Trudeau supports building millions of units to restore affordability, as he seeks to win over voters with his government well behind in polls before elections next year.
But boosting supply will be frustrated by a lack of building capacity and by cities reaching a scale making traditional Canadian housing unrealistic, Baum-Snow said. “People always have the option to move to Winnipeg and live in a single-family home that they can buy for under half a million dollars. A lot of them choose not to,” he said. “That’s how most people in Europe and Asia live, and Latin America too, everywhere else in the world basically outside North America.”
NEW THINKING NEEDED
Construction productivity has lagged the economy's average for a long time, a big reason home prices doubled overall inflation through the last two decades, he said.
“It’s going to be very expensive to build all these new homes. If we want to do this, it seems hard to imagine how the market could support that,” he said. “Trades workers are making very good pay as it is now, and if you were to double the number of housing units built, the labor costs would go through the roof.”
Rapid construction for poor families could repeat the slums Canada and the U.S. built in the past, Baum-Snow said. Singapore and Austria have had more success in this area and there has been praise for U.S. builder tax credits, though that brings perceptions of corporate giveaways.
“New thinking about how to manage these sorts of social housing units has to be done if the government wants to get involved again in building housing, because it hasn’t worked so well.”