Speaking Notes for Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Canadian Club of Toronto
Sheraton Centre Hotel
123 Queen Street West
Check against delivery
Thank you; it’s a pleasure to be here.
In 1945, Hugh MacLennan wrote a great Canadian novel called Two Solitudes about the tension between English and French identities in our country.
Today, I would argue, the two solitudes prevailing across the globe are the gap between the very wealthy and the deeply poor – a gap that is widening every day.
Inequality threatens the very fabric of modern western society. As Professor Richard Florida of the Rotman School of Management notes in his book, The New Urban Crisis, unexpected referendum results in the U.K. and election results in the U.S. are indicative of this growing divide.1
After a year of broad consultations, the Government of Canada and our Minister, the Honourable Jean-Yves Duclos, have asked CMHC to lead the development of a National Housing Strategy, a once-in-a-lifetime opportunity to ensure Canadians have the housing they need and that they can afford.
I will be so bold as to suggest that the Strategy is being created precisely to diminish the inequity that we see growing in our communities daily – to close the gap between the “haves” and “have nots.” We contrive to solve this problem so many others ignore – because we are Canadian.
I’d like to advance the idea today that affordable housing is essential to a growing economy and to a healthy society. I’d also like to assert that our National Housing Strategy is inherently, deeply Canadian. We have deliberately invested it with Canadian values like tolerance, diversity and social inclusivity. These qualities are in fact central and not at all frivolous.
In short, our plan isn’t really about housing at all. Our objective is not just to build more houses, although that is big part of what we will do. In fact, we have been far more ambitious than that.
People, rather than buildings, are at the heart of our program design. As Harvard sociologist Matthew Desmond writes in his Pulitzer Prize winning book Evicted, “The home is the wellspring of personhood. It is where our identity takes root and blossoms ...”2
Housing Affordability and Economic Growth
Buildings are full of people with their own identities and their own stories. Along with BC Housing, we supported construction of a transitional shelter that recently opened in Coquitlam. One of the residents is a gentleman called Mike. Here's his story:
Mike’s story is one of 95 at 3030 Gordon Street. We could see all that he has to his name in that video. We built Mike a place to live, for now. However, in Greater Vancouver, like here in the GTA, the cost of housing is just another factor keeping people at the margins of society.
Research suggests that housing values exacerbate the gap between rich and poor. Our own research has found a very strong relationship here in Toronto between wealth and income inequality and house prices.
Our observation echoes the work of Matthew Rognlie at MIT.3 Rognlie shows that the share of net income generated by housing has risen in all G7 economies since data became available after World War II. “Observers concerned about the distribution of income should keep an eye on housing costs,” he writes.
Housing has helped the rich get richer, as the poor get poorer.
That's true for Mike and it can be true for entire economies as well. I’ve talked before about the relationship between high house prices and household debt and the increased potential for economic weakness.4 An attempt to quantify that drag on the economy has now been made.
Economists looked at the experience of 54 economies from 1990 to 2015 and found that every 1 per cent increase in the household debt-to-GDP ratio tended to lower growth in the long run by 0.1 per cent.5
While household debt provides a temporary boost in consumption, mostly for less than a year, the negative long-run effects on consumption tend to intensify as household debt-to-GDP exceeds 60 per cent. The overall drag on GDP growth tends to intensify when the ratio exceeds 80 per cent.
Today, Canada sits well over both thresholds at more than 100 per cent.
Emerging Social Pressures: The Threat of Gross Inequality
A YouTube video on “Wealth Inequality in America” paints a worrisome picture.6 Now with almost 20 million views, the video explains that the top 1 per cent own 40 per cent of America’s wealth while the bottom 80 per cent hold only 7 per cent.
Artistic reproduction of chart from “Wealth Inequality in America”
Nelson Mandela said that, “As long as poverty, injustice and gross inequality persist in our world, none of us can truly rest” (emphasis added). Mandela meant this in sympathetic terms, but there is a menacing side to his statement as well. As a matter of fact, the last time this level of inequality existed, fractures emerged in our society, the world ultimately went to war and the Great Depression followed.7
Stimulating Housing Supply to Confront Affordability
As I mentioned earlier, it turns out that housing has aggravated our inequality problem. Conversely, therefore, affordable housing can help provide a solution.
Emerging clouds call for governments to act. We must first identify the causes behind the housing affordability problem we're trying to solve. Policy should be made based on evidence and rigour, not anecdotes about who is buying what houses in what neighbourhoods.
CMHC has recently conducted extensive economic research on the causes behind house price escalation in Canada’s major cities, particularly Vancouver and Toronto. We weren’t surprised that over the long run, the usual economic suspects were the principal factors: first, economic growth and job creation and, second, population growth and immigration. Those two cities lead Canada on these measures. And thirdly, low interest rates provide further stimulus.
Vancouver and Toronto are increasingly in the company of world class cities. House prices in major cities are decoupling from their home countries and increasingly behaving more like each other.8
Cities are our economic engines and urbanization is predicted to continue. Cities currently account for 54.5 per cent of the world’s population and are expected to be two-thirds by 2050, doubling the urban population and reflecting a full reversal of the urban/rural proportion in 100 years.9 House price pressure in Canadian cities will therefore continue to build.
Three other factors are meaningful to short-term price appreciation, and can aggravate price volatility. They are: (1) speculation and investment activity, (2) the wealth and income effect I mentioned earlier, and (3) supply.
As to the first of these, despite hearsay about foreign investment driving prices up, all of the data confirm that the majority of investment activity is still from domestic sources. In its annual review of the Canadian economy, the IMF labelled taxes on foreign real estate transactions as "discriminatory". While foreign investment is increasing, policy must address the impacts of speculation whatever the source.
In fact, governments cannot fully contain the combined sources of increased housing demand in Toronto and Vancouver. And policies that further stimulate demand only push prices higher, making the problem worse.
Demand-side support seems appealing but can be counterproductive. Mortgage insurance and the capital gains exemption on the sale of primary residences both add to primary demand for housing in Canada. In the absence of responsive supply, policies like these tend to make sellers wealthier, exacerbating a divisive inequality gap.
Affordability challenges therefore call for a supply-based policy response. And that's exactly what we’ve done: Canada’s National Housing Strategy aims to increase rental supply by up to 80,000 units and to modernize another 250,000 units over the next 11 years. The Strategy will stimulate roughly $9 of supply for every $1 of demand it aids.
In addition, our recently launched Rental Construction Financing initiative will give preference to projects in municipalities that accelerate approvals and waive fees. We are incentivizing more and faster supply.
Over time, housing construction in Canada has diverted away from purpose-built rental housing. Yet, core housing need – a measure of housing affordability that asserts that having to spend more than 30 per cent of your pre-tax income to access adequate, suitable local housing is onerous – among renters sits at 26.4 per cent compared to 6.5 per cent for owners.10
Our aim with the National Housing Strategy is to address this rental gap: vacancy rates in Toronto (1.3 per cent) and Vancouver (0.7 per cent) manifest the shortage of rental housing for people who need it most.11