Canada’s Real Estate Market is in Hyperinflation

At some point a duck needs to be called a duck: Any reliable source will show that Canada’s real estate market has been inflating proportionately higher than all other economic sectors for the past 20 years or so. If we look at the real cause and real effects of this, we’ll see very easily that no one, including the middle class, have to be left behind, problems such as homelessness can be greatly alleviated, and all that has to change is for government to do a better job of managing the economy.

Simply reading the definition of the term ‘hyperinflation’ on an economics site plainly shows that the real estate sector in Canada qualifies. Canada, like most western democracies, has been increasing its money supply while lowering interest rates since the 2008 financial crisis and even since the dot com boom and bust in 2000.

As is cultural practice and tradition, the middle class has been moving more and more of what is available to them of this new and cheaper money into real estate. This increase in money availability of course increases demand while flow of course raises prices.

The easy money and low interest rates also attract international investors into the sector, who in turn drive up prices even higher and faster. Of note is that a few recent policies, in Vancouver and Toronto for example, have finally begun to target international real estate speculators in Canada.

Where does this new money come from? The Bank of Canada, of course. Like all western democracies, Canadian currency is managed by a central bank with the goals of maintaining a healthy economy and keeping inflation low but still positive.

To do this in the past two decades, the Bank of Canada has had to increase the overall money supply and lower interest rates to such a degree that as a side effect it has substantially contributed to pushing Canada’s real estate sector into hyperinflation mode. Now, the Bank of Canada of course does not choose to or have the goal of facilitating hyperinflation in any sector, and of course not one as important as Canada’s real estate market.

Let’s ask why our central bank, which always acts in the public interest generally, has been increasing the money supply and keeping interest rates historically absurdly low. The reason is the overall poor management of the economy. Who manages the economy? Government, of course. The central bank is only a reactionary institution to overall economic trends and not a policy setter itself, all proactive policy is set by government.

Successive federal, provincial and municipal governments have been serving the needs of investors above and beyond those of the general population. When this happens, investors are put at the helm of the whole economy and any problem with the investor class needs to be solved above all problems.

If the stock market crashes or there is a dot com boom and bust or an international financial crisis, investors are propped up by subsidies and policies by governments with almost no questions asked. Central banks don’t have much choice but to follow suit and prop up investors as it has become their sole means of saving the overall economy.

All three levels of government have been serving investors above all, from federal corporate welfare and industry-specific subsidies at the provincial level, to permits, zoning changes and subsidizing gentrification at the municipal level. This policy direction from governments has itself also contributed to real estate hyperinflation through increasing the availability of investment capital for real estate purchases, increasing pressure for apartments to be converted into condos and for land to be sold to real estate developers.

The middle class acts as a whole with one of their primary or main goals remaining home ownership. They divert more and more of their disposable income into real estate, furthering the upward spiral of real estate prices and rendering much of them ‘house-poor’ and otherwise lowering their consumer purchasing power until their home is finally paid off.

As government funds are diverted to investors, fewer funds proportionately are available for public services. Health care and schools suffer, just for example. People become less healthy and educated negligibly on a yearly basis, but considerably over time.

Advocates and activists for societal causes such as homelessness have fewer resources while the number of homeless increases. The reduced availability of affordable apartments due to gentrification and condoization further causes an increase in homelessness. Hyperinflation in the housing market forces some middle class members to entirely abandon home ownership and choose rental apartments instead, further crowding out those in the rental market and increasing homelessness further.

While it is true that profit and investment gains are ultimately good for everyone, this goodness is allotted extremely unequally, with top investors benefitting greatly and lower income earners benefitting almost negligibly. The middle class can be easily persuaded to feel good about their investment gains while reaping a proportionately low percentage of these gains and having to divert increasingly larger amounts of their budgets toward housing. Government overly pandering to investors therefore causes the economy to be incapable of providing conditions favourable to universally affordable housing.

The simple subsidizing of social housing is often cited as a key solution by activists in response to this situation. This is a band-aid only, at best, as causal problems are not solved. The best long-term solution would be a large-scale shift in political momentum toward long-term investment in everyone’s health, education and well-being, which will create a society of more innovation, able and productive people.

Increasing funding of public services while simultaneously reducing funding of the investor class re-allocates resources from inflationary and already well-off recipients, to include disadvantaged and potentially seminal ones. Creating broad improvements in prosperity and economic conditions rather than simply inflating investment values requires less central bank corrective intervention, which in turn reduces inflationary pressures on the real-estate sector.

With less real estate inflation, the middle class would once again gradually increase its purchasing power, which in itself is a positive driver of economic conditions, and be able to leave more room in the rental real estate market.

Housing-as-a-human-right type policies can come and go as governments do, election-to-election. Correction of general economic conditions generally outlast any single government mandate and provide the economic conditions necessary for universal housing affordability and solve real estate hyperinflation entirely. Only then will central bank policies be able to be normalized and the housing market will correct.

The investor class must realize that investing in the health and education of everyone will provide them with better employees. Governments must realize that directing public funds to the public, rather than investing in investments, reduces drains on public funds and provides for better economic conditions long-term. The middle class must realize that their own governments are the cause of the real estate hyperinflation they suffer through.

Featured Image: Recreation of the UP balloon house from the National Geographic Channel

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