The Price of Housing (1)
Gatineau has been one of the hottest real estate markets over the last year, with prices climbing more than 25%, and over 60% in just 4 years. Although last year’s real estate inflation was lower in Ottawa at about 15%, the average price of a home there is nearly twice that of Gatineau, meaning that prices on this side of the river still have a lot of room to climb. Annual inflation of rent in Gatineau is far lower than purchasing a home, but has still been in excess of 5%, a tremendous burden on lower income families when taken over a period of several years.
Lately, many have been blaming insufficient supply of housing as the main cause of the explosion in prices. As populations grow, the need for more homes to meet rising demand is certainly an important factor in real estate inflation. The population of Canada grows a bit less than 1% per year, mostly via immigration. These new residents need places to live, and if the supply of housing doesn’t keep up, it’s to be expected that prices will rise.
However, can such increases in population really explain such higher costs on their own? Looking to Europe, the argument becomes a little shakier. Over the period 1998 to 2018, real estate prices in Canada surged by over 250%. Yet France, with rates of population growth less than half Canada’s, still saw the price of an average home climb by over 200%.
Interest rates are often cited as another major factor causing higher prices. Lower rates mean that buyers can bid higher for houses and still afford their monthly mortgage payments. Yet greater borrowing power isn’t the only driver behind higher offers. Another major component is investors, both domestic and foreign. They see real estate as a safe place to put their savings, and may only be looking to hold on to these properties for a few years before selling for a profit. The share of transactions coming from investors has been steadily increasing in recent years, now accounting for nearly a quarter of transactions in Canada, and mostly concentrated in hot urban markets. Unlike first time buyers, they often have the means to pay in cash on the spot. Plus, investors paying more for homes make investing in real estate more tempting to others looking for high returns, who then invest their savings and drive up the price of housing even further.
Another factor driving up prices is blind bidding. When the market overheats and houses sell quickly, desperate buyers afraid to lose out feel an incentive to add thousands of dollars to the asking price as a way to increase the likelihood of being the winning bidder. This is a vicious cycle, as this buffer needs to be ever higher as more buyers adopt the approach.
The problem of affordability in housing is certainly complex, as are solutions. Although governments are paying more attention to this problem, much still needs to be done to ensure future generations are able to own a home.