Self Supply Tax and Rebate for residential rental construction

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We reach out to banks regularly to finance construction of rental building. Due to the high turnover as well as fast growth at the banks, there is a new analyst doing the grunt work financial and credit analysis of our construction proforma number. Whereas all other cost figures are pretty straight forward to understand, I have found analysts to be flummoxed by the self-supply HST number. Initially they reach out to their seniors in the banks who explain it to them as best as they could. Then the analysts reach out to me to confirm their understanding and I tell them that they have understood it wrong. So here I try to explain the concept of self-supply HST when it comes to construction of rental building.

What is Self Supply HST ?

From the Canada Revenue Agency website,

If a builder constructs or substantially renovates a residential complex that is:

  • a single-unit residential complex,
  • a residential condominium unit, or
  • a multiple-unit residential complex,

and subsequently supplies

  • the single-unit residential complex,
  • the residential condominium unit, or
  • a residential unit in the multiple-unit residential complex

by way of lease, licence or similar arrangement for use by an individual as a place of residence, the builder is deemed to have sold and repurchased (i.e., self-supplied) the residential complex at its fair market value generally

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when the unit is first rented. In the case of a multiple-unit residential complex, such as an apartment building, the builder is treated as having sold and repurchased the whole of the residential complex, i.e., the whole apartment building, at its fair market value generally when the first unit is first rented.

Why Self Supply HST ?

From the same website

The self-supply rules … apply only to “builders” and their purpose is to remove the potential tax advantage a builder would have in constructing or substantially renovating a residential complex and then offering the residential complex for rent or appropriating it for the builder’s personal use. A person who is not a builder who wanted to do the same would have to purchase the new or substantially renovated residential complex in a completed state from a builder and would have to pay GST/HST on the purchase. In the absence of the self-supply rules, the builder who constructs or substantially renovates a residential complex would generally experience a competitive advantage through tax savings on the non-taxable value that is added to the residential complex, such as the value of employed labour, financing costs and profit which would otherwise be realized through the sale price established by a builder who sells the residential complex.

Let’s take a simplified example

Say a builder constructs a residential rental complex at a cost of $100 Million and its market value is $200 Million. The builder would have paid $13 Million (at the rate of 13% comprising of 8% of Ontario provincial tax and 5% federal tax) as tax on the costs. Now if a REIT buys this from the builder, the REIT will have to pay $26 Million as tax.

From tax perspective, building a residential complex gives substantial tax advantages compared to buying a ready built residential complex. The purpose of self supply rules is to eliminate this tax advantage.

Note that the self-supply rules that apply to a supply of a residential complex are triggered only if the supply is by way of lease, licence or similar arrangement. The self-supply rules are not triggered if the supply of the residential complex is made under an agreement of purchase and sale.

In simple words, self supply tax is only triggered if the builder is renting out the newly constructed/renovated units.

When to Pay Self Supply HST ?

In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.

So in our proforma modeling, using the aforementioned example, $26 Million self supply tax is paid on the day building is completed and first unit is rented out.

What is the Fair Market Value ?

the fair market value represents the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact.

So how does one estimate the fair market value of the building yet to be constructed in the proforma. One way is to ask an appraiser to provide us with a fair market value or the building “as completed” or “as stabilized” and use that to arrive at the HST value.

Alternatively, this is how I estimate the fair market value

  • In the rental proforma, calculate the stabilized NOI which is the annual NOI for Year 2.
  • Discount it by 2% rate (for inflation, turn over and rent increases during the year) to bring the NOI value one year.
  • Divide it by prevailing cap rate of 4.5% to arrive at the Fair Market Value.
  • HST is calculated by multiplying Fair Market Value by 13%.
  • The FMV is usually divide by Net Saleable Area (NSA) or Net Rentable Area (NRA) of residential units to arrive at FMV of each unit which is required to calculate NRRP rebate (as explained in following section).

New Residential Rental Property (NRRP) Rebate

At the same time, we also apply for the rebate under NRRP rebate program. One can consult with their tax advisor or visit the CRA website GST/HST new residential rental property rebate to find out more about how the rebate is calculated. To summarize,

Builders in Ontario are charged 13% HST on their self supply, which consists of a 5% federal tax and 8% provincial tax. The NRRP rebate in Ontario essentially kicks back 75% of the Ontario portion of the HST, which maxes out at unit value of $400,000. This results in a maximum rebate at a provincial level of $24,000 ($400,000 x 0.08 x 0.75) per unit. Federal rebate pays back 36% of the Federal portion of the rebate for units with a maximum rebate of $6,300. However, if the unit is valued at more than $450,000 no rebate is available. Based on the type of units constructed it can be substantial amount up to 50% of the self supply HST amount. For example, in our above example where $26 Million cheque was written to CRA, depending on the type of units build, the rebate could be as substantial as $11 Million. Thus the net HST to the builder would have been $15 Million ($26MM self supply – $11MM NRRP rebate).

As to timing of receiving the rebate, it varies. Builders usually apply for the rebate as soon as they file the payment. I generally model that the rebate is received at the end of lease up period. In reality, it could be later or earlier.

Proforma Modeling Consideration

From construction financing as well as cash flow perspective, it is imperative that the timing difference between payment of HST and receipt of rebate is understood. I have seen many a loan documents as well as proformas wherein the builder has modeled the net HST amount. This leads to a cash flow squeeze right around the time when the building is complete, all the credit limits are fully utilized because the bank approved a $15MM amount for the net HST amount whereas the builder ended up writing a cheque to $26MM to CRA and it will be some time before the rebate cheque is received from CRA.




Can Smart Contracts on Blockchain save Toronto real estate ?

Smart contract creates more problems than it solves for such transactions

If the real estate transactions were conducted on blockchain using smart contracts, the sales would have gone through and buyers wouldn’t be walking away from his deposit — A Disappointed Realtor


People have been writing about the Canadian real estate “bubble” for ages. I know that as I have been one of them, most notably For Canadian GTA and GVA residents, the American Dream is dead and Predicting Minsky moment for Canadian housing. However, knowing the track record of forecasters, I shied away from calling it a bubble.

“The (stock) market has predicted nine of the last five recessions” — Paul Samuelson [Nobel Laureate]

The Canadian press highlighted the rising prices in Greater Toronto Area (GTA) and Greater Vancouver Area (GVA) yet it always ready with the justifications for the price increase to be sustainable: Greenbelt regulations (see Is “Places To Grow” Act to be blamed for GTA Housing unaffordability?), rising number of new immigrant families making GTA their homes, low availability of ready housing etc.

South Of The Border

Then Ben Carlson at Bloomberg got whiff of what is going on in Canadian real estate and wrote a piece for Bloomberg View on June 21, 2017. (Well Zerohedge has been writing about it for years but no one takes Zerohedge seriously except for gold bugs).

The money quote from the above article is given below. More scaremongering if you ask me.

No one knows when insanity like this will come to an end. Bubbles are like an avalanche. The longer they build up, the worse they will be when they eventually destabilize.

Then two days ago, Noah Smith of Bloomberg View retweeted the same article with this scary chart from the article. Nothing new.

The Tide Turns

What is new is that over the weekend, the tide seemed to have turned as Canadian press published a number of articles which hinted that there is a correction coming in the market.

Between 2011 and 2016, the number of households in Toronto rose to 2.14 million, an addition of about 146,200, according to the census data, the latest round of which came out Wednesday. That compares to 175,825 new homes built over that period. In other words, supply of new houses exceeded real household demand by almost 30,000 over those five years.

That throws cold water on the argument — voiced particularly by the industry — that the city’s affordability crisis won’t be resolved unless the government introduces measures to help increase supply.

“Every step of the way everything that could be a headache has been a headache,”

Toronto Star carried a very detailed story about how buyers are having difficulty closing the transactions as lender approved appraisals are coming at lower prices and buyers are contemplating walking away from deposits.

Lawyers, realtors and mortgage brokers report a surge in calls from distressed sellers whose buyers purchased in the heat of the market, only to find that the subsequent drop in the home’s value is more than the cost of walking away from a deposit.

Others, who bought unconditionally, have discovered they can’t get the financing to meet their purchase obligation. In some cases, the bank appraisal has come in at a value below what a purchaser agreed to pay, leaving the buyer scrambling to make up the difference.

Innisfil RE/Max Chay real estate agent Heather Jones is dealing with the heartbreak of home buyers having to walk away from a deal right now.

And Jones is not alone, as buyers have to come up with extra cash now that the market has levelled out again.

“What’s happening is people purchased these properties (to fight) multiple offers with no conditions, and basically they believe it’s a done deal,” Jones said.

But when an appraisal says the home is worth less than what was offered, the buyer is on the hook.

Jones encouraged her homebuyer to walk away from her deposit, and for the home seller not to pursue legal action.

From The Front Lines

But no one knows the lay of the land like realtors and they give their minute by minute analysis on social media mainly Facebook, Instagram, LinkedIn and Twitter etc. Below is the sampling from yesterday.

By @remaxcondoplus on twitter

By @choosemj on Instagram

Blockchain and Smart Contract

So you might be wondering, and rightly so, where does blockchain and smart contract comes into all of this. This was prompted by a statement by a disappointed realtor friend of mine yesterday who probably heard it from his fintech enthusiast friend saying

If the real estate transactions were conducted on blockchain using smart contracts, the sales would have gone through and buyers wouldn’t be walking away from his deposit — A Disappointed Realtor


But first, a few words (read tweets) from chief evangelist of Blockchains

Then, a customary definition of blockchain

A blockchain is a ledger of records arranged in data batches called blocks that use cryptographic validation to link themselves together. Put simply, each block references and identifies the previous block by a hashing function, forming an unbroken chain, hence the name.

Put like this, a blockchain just sounds like a kind of database with built-in validation — which it is. However, the clever bit is that the ledger is not stored in a master location or managed by any particular body. Instead, it is said to be distributed, existing on multiple computers at the same time in such a way that anybody with an interest can maintain a copy of it.

Better still, the block validation system ensures that nobody can tamper with the records. Rather, old transactions are preserved forever and new transactions are added to the ledger irreversibly. Anyone on the network can check the ledger and see the same transaction history as everyone else.

Followed by, definition of smart contracts

The idea of smart contracts goes way back to 1994, nearly the dawn of the World Wide Web itself. That’s when Nick Szabo, a cryptographer widely credited with laying the groundwork for bitcoin, first coined the term “smart contract.” At core, these automated contracts work like any other computer program’s if-then statements. They just happen to be doing it in a way that interacts with real-world assets. When a pre-programmed condition is triggered, the smart contract executes the corresponding contractual clause. [It does not require any human / external intervention].

Smart Contract and Canadian Real Estate

How does my friend think the blockchain and smart contract system works? To him it was simple. Smart contracts cannot be backed-out of. Once the buyer signs the smart contract to purchase a house, the transaction will go through as smart contract will ensure that buyer will complete the transaction.

Hence yours truly felt responsible to explain to him that despite all the hype, smart contract is just a computer code on a blockchain network. And the problems encounters in executing transactions through smart contracts are bigger than challenges faced by him currently. For example:

1. Oracle Problem

In computing, oracle is used as a mechanism for determining whether a test has passed or failed. Someone needs to tell the smart contract running software that buyer has not completed the transaction. That defeats the whole purpose of smart contract as it is supposed to be automatic. Once you introduce a human element, the transaction will not go through. For example, let’s say the realtor was to act as oracle. The buyer could have the realtor arrested or kidnapped and the smart contract will not be executed.

2. Assets On The Blockchain

You might argue that why would one need an oracle. Once the closing date approaches, the contract should automatically execute i.e., having the all the assets of the buyer on blockchain.

Firstly, the buyer was arranging a loan from the bank so obviously he didn’t have enough assets in place to complete the transaction.

Secondly, even if he had assets, they should be on the blockchain in the form of cryptocurrencies. This opens a whole new Pandora’s box of buyer being tech savvy enough to not only own cryptocurrencies but also having them stored in a hot wallet or in a cryptocurrency exchange where cryptocurrency exchange agrees to act as an escrow account. But to provide smart access to your hot wallet, you will have to give surrender your keys to the smart contract and you might as well kiss your cryptocurrency goodbye now. If the cryptocurrency exchange agrees to act as your escrow agent, the question arises why this transaction can’t be completed safely, securely and conveniently in the real world with a bank and a law firm. But if the buyer keeps the cryptocurrency in cold wallet, smart contract cannot touch it. [Apologies if this paragraph was too wonkish. Suffice to say cryptocurrency presents its own myriad challenges. For a sample, you can Google about securing cryptocurrency through hot wallets or cold wallets to realize the needlessly cumbersome challenge it is].

Thirdly, you might argue that it need not be cryptocurrency. Once blockchain takes over the world, the registry of such assets as buyer’s car registration or house registration will be maintained on blockchain and smart contract as part of its execution/enforcement transfer the ownership from the buyer to seller of these assets. But then the car or the house exists in the real world and smart contract cannot help you to take possession of it. Matt Levine highlighted this in Bloomberg like this:

My immutable unforgeable cryptographically secure blockchain record proving that I have 10,000 pounds of aluminum in a warehouse is not much use to a bank if I then smuggle the aluminum out of the warehouse through the back door.

3. In Computer Code

Whereas real world contracts are in English (or any other comprehensible) language, smart contracts are in computer code. True that code is open for all and everyone to see but if anyone who has worked in software engineering will tell you, it is very hard to write a bug free code. You may argue that a standard code can be used for standard sales and purchase. But if anyone has ever signed a purchase agreement, they know that there are always some amendments and additional conditions added to account for the idiosyncratic aspects of each transaction. Who is to ensure that while making such amendments in a smart contract, a software programmer does not enter malicious code?

4. Immutability

In the real world, and as those people who work in contract law know that, nothing is simple. The agreements exists not to define what happens when everything goes smoothly rather how to proceed when things do not move according to plan. Even after agreements are signed, there are addendums, amendments etc. and even negotiations post executions and if material adverse information becomes available, contract can be cancelled. Smart contract on a blockchain means that once the contract has been entered into the system, it cannot be changed.

5. Medium of Exchange

Smart contracts and blockchains at the moment deal in cryptocurrencies. Eventually they may move into fiat currency but if that is the case, the whole movement to move towards blockchain is a moot point. It should be remembered that blockchain existed to facilitate bitcoin transactions. If the enforcement of smart contract is in the form of transfer of cryptocurrencies, the house will need to be quoted in cryptocurrency value. With the very volatile nature of cryptocurrency values, both the buyer and seller don’t what they are getting in the real world value. Below is the bitcoin currency chart with respect to US Dollars. Depending on the day rather depending on the minute/second smart contract is executed, the value transferred in real world terms can be significantly different.

6. Confederacy of Coders / Miners

Last but not least, the legislative system in Canada is fairly stable and having precedence of decades of case law guiding how the legal system will behave. There is no such precedence in blockchain. In blockchain world, it is a confederacy of developers and miners who decide how the blockchain will evolve. This is the case with the recent forking of bitcoin into Bitcoin and Bitcoin. It needs to be mentioned that forking decision was not taken by votes from investors in bitoin. It was taken by group of coders and miners of the currency. From philosophical point of view, the investor is moving from tyranny of government to tyranny of coders/miners. Earlier after the DAO hack, there was a rollback of Ethereum blockchain again decided by developers/miners. So what will happen to your smart contract when it executes, there has been a forking of the blockchain? Whereas right now if the buyer reneges on sales and forfeits his deposit, the seller can pursue him in the court of law for making up the difference. However, in case of smart contract, it is anybody’s guess how the smart contract will be executed. Once executed, neither the seller nor the buyer will have recourse to court of law because in smart contract world, CODE IS LAW.


Replacing standard language contracts with smart contracts sales and purchase transactions make realtors yearn for the days when they used to worry about was buyer walking away from his deposits.

How Tech is going to disrupt the Canadian real estate industry

Notes from the Toronto Real Estate Forum 2016

I attended the Toronto Real Estate Forum which was held from November 29 to Dec 31, 2016 in Toronto. Herewith are the notes I took on the Panel that talked about tech disruption awaiting the Real Estate Industry.

John Ruffolo, Chief Executive Officer, OMERS Ventures

Sheila Botting, Partner & Canadian Real Estate Leader, Deloitte LLP
Amy Erixon, Principal & Managing Director, Investment, Avison Young
Dave Kim, Co-Founder & CEO, Harbr
Chris Matys, Chief Analytics Officer, Georgian Partners

Though the moderator tried to keep a focus on real estate but due to pervasive nature of technological disruption, the discussion was wide ranging (read: all over the place)

Opening Remarks by each panelist

Avison Young: 
If you do not believe tech is going to disrupt the real estate industry, your head is in the sand. Like the frog in boiling water, by the time you realize that market is changing, it will be too late.

Construction industry hasn’t been disrupted so far. What Harbr and startups like it are bringing to the market is how to disrupt the construction industry by having sensors, data analytics, 3D models, Just in Time (JIT) for goods as well as labor.

– Canada is 26% less productive in US and Canada spends 56% less on tech than US. Canada is not prepared for the future.
Deloitte carried out a study which found out that 40% — 60% of time there are no “bums on the seat” in Deloitte’s offices. So now Deloitte has 4,500 people with laptops with no dedicated workspace in their new office building. They come in, set up their laptop at any available place and then move out. This makes Deloitte more agile and nimble.
– Capital savings that Deloitte made from the above step was reinvested back in technology and that is what others are doing too
– The office is evolving from a place of paper pushing to place of collaboration and transfer of knowledge. Deloitte’s new office is greatly suited for this.

Georgian Partners: 
People talk about technology disrupting low wage work such as drivers, cashiers etc. But technology is coming very rapidly for the white collar work such as lawyers, doctors, bankers etc. Technology is coming for the stuff that requires vision i.e., sorting, handwriting reading, visual inspections, site visits etc. Going forward all such activities will be automated using drones, robots, AI (artificial intelligence).

Open Discussion


Real estate due to its long term nature (60 years of life for a building, 10–15 year long leases) likes status quo and is not open to change. Millennials don’t like this:

  • They don’t want to be stuck with the 25 year mortgage for a place
  • They want to have the flexibility to move to a different location (city, country etc.) quickly if the job changes
  • They want to work from home one day a week
  • They are looking for experiences
  • They don’t like email just as the generation before them didn’t like snail mail. They are into messaging/conversation. Initially the conversation will move to services such as Slack, WeChat etc. It may be something entirely different 5 years from now.

Real estate industry and other industries have to change to accommodate the millennials. Allowing them the option of remotely working, working from home, and have offices like Deloitte which allow for collaboration etc.

This will mean that these companies will require less office space and lesser employees. Deloitte saved 25% office space and associated maintenance expenses. In a few years, other corporate entities in downtown will eventually do the same. They are already downsizing. This may lead to glut of office space in downtown.

Breather is a company that is working on short term commercial sub-leasing for 1 to 30 days. They have just started and raised around $20 million in Series B round. They have just started out and are flush with cash. Pretty soon other companies will jump into fray. 5 years down the line you can bet that these companies will be disrupting the commercial office leasing market as AirBnB and Uber are disrupting hotel and taxi markets respectively.

Downsides of technology

  1. Very distracting: Emails, messages, Snapchat, Slack, chat rooms are all fighting for attention. Just grabbing attention isn’t important, but also how to continue holding it. People need to know when to “turn off”.
  2. Current training and education system not set up to cope with technological disruption. Urgent training and education reform is needed to counter the following adverse impacts:

– Remote working/working from home can employees make less collaborative. They need to be educated on how to collaborate when not sitting face to face.
– As seen recently during elections that when people hide behind technology such as social media accounts etc., their filters come off. They are more aggressive and abusive. Education and constant reinforcement will be required to keep people and environment conducive to work
– A different ecosystem needs to be developed to measure performance of employees and their output. If they are working remotely, measuring work punching in and punching out 9am and 5pm will not work.

Immediate disruptions / trends on RE horizon

  • The lowest hanging fruit is brokers. There will always be room for brokers but not this many brokers. Think of brokerages as travel agencies before Expedia arrived on the scene.
  • Crowd sourcing of investors for commercial real estate is picking up pace in US and UK. You have Breather on tenant side and crowd sourced investment in CRE on the landlord side and a layer of intermediary brokers is no longer needed.
  • Retail — As many bank branches and shopping stores no longer needed. People may go to shops to try stuff but will not carry it. It will be delivered to their home directly from warehouse or manufacturing facility
  • Internet of Things (IoT) and Artificial Intelligence (AI) — Doesn’t need to be ground breaking inventions. Small stuff like the NEST thermostat which constantly monitors the environment, learns and changes its behavior. Jobs that will be destroyed due to this: drivers, administrative assistants, and those requiring visual inspection such as radiology, site inspection, sorting etc.
  • AR / VR: Kids don’t like to read anymore. AR / VR will be used for education, training, real estate model visualizations etc.
  • Technology will make suburbs popular again with Millennials. They like downtown living when they are young. Once they start a family, they would like to move to the suburbs. They don’t have to commute anymore as they would be working from home.
  • AI is coming for white collar jobs. As a closing statement, MD of Avison Young recommended that we read the article that appeared in fastcompany website These Will Be The Top Jobs In 2025 (And The Skills You’ll Need To Get Them)

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Canadian dream is alive for the wealthy class

Canadians take on more debt but their indebtedness decreases

Q: How to find a day care that doesn’t cost as much as your mortgage?

A: Get a bigger mortgage

New stats were released by StatsCan today. Depending on you how you want to look at it but people have been finding both positive and negative aspects in it.

On absolute basis, household debt increased.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,004 billion at the end of the third quarter. Consumer credit was $590 billion, while mortgage debt stood at $1,312 billion. The share of mortgage liabilities to total credit market debt edged up from 65.1% in the second quarter to 65.5%.

Household credit market debt to adjusted disposable income (excluding pension entitlements) edged up from 166.4% in the second quarter to 166.9%. In other words, there was $1.67 in credit market debt for every dollar of disposable income.

Ratio of credit market debt to disposable income

The increase is mainly result of increase in mortgage liabilities. On the flip side, the value of the value of assets held be households has been increasing at a higher rate. As such, when comparing indebtedness to total assets, the ratio has actually gone down.

Household sector net worth at market value rose 2.5% in the third quarter to $10,133 billion. On a per capita basis, household net worth was $278,200. The leading contributor to the rising net worth was a 3.2% increase in financial assets as the value of investment fund shares, particularly mutual fund units, life insurance and pension assets, benefited from stronger domestic and foreign securities markets. Non-financial assets grew 1.2%, mainly real estate assets.

Leverage as measured by the ratio of household debt to assets edged down from 16.9% in the second quarter to 16.7%.

Household sector leverage indicator: Debt to total assets

So putting all of it together

Needless to mention, that aforementioned is an aggregate measure and would be hiding certain segments of Canadians who will be stressed out by high leverage but on overall level, it is business as usual if it is not worse.

So if you didn’t worry when earlier data came out and I wrote Worry about Canadian real estate but don’t lose sleep over it — CMHC then I don’t think there is anything to worry about here.

True in US Fed has increased rate but that increased rate is token 0.25% and BoC is not expected to follow suit. So Canada has a lot of buffer before we start worrying about increasing interest rates leading to a bursting of real estate bubble which I already discussed in Predicting Minsky moment for Canadian housing is moot exercise.

And Canadians are pretty judicious about paying their bills. So much so that US investors can’t have enough of Canadian debt

Credit-card debt of prudent Canadians finds eager U.S. buyers

What makes the debt attractive to U.S. investors is that Canadian consumers are more likely to pay off their bills in full every month than their American counterparts. In the third quarter, the average monthly payment rate for Canadians was 47 percent, versus 29 percent for Americans, according to Fitch Ratings. A similar payment gap has been in evidence for since 2012, even as the rates climbed in both nations from crisis lows.

To be sure, credit-card backed securities, being unsecured by collateral, are only worthwhile as long as the customers keep the checks coming, and even cautious Canadians have taken on historically high levels of debt, exceeding the country’s gross domestic product for the first time. Bank of Canada Governor Stephen Poloz has warned that high levels of debt could magnify any economic shocks, and Finance Minister Bill Morneau has introduced a number of mortgage rule changes designed to cool the nation’s red-hot housing market.

Yet even as Canadians take on bigger mortgages, there’s no evidence that it’s affecting their ability to pay down their credit-card bills. That creditworthiness will keep their debt in demand by American investors, and the U.S.’s lower borrowing costs will keep Canadian banks heading south to sell it.

But I want to discuss something else here: How the rising real estate prices will play havoc with Canada’s social fabric? I kind of hinted at it here Can rising real estate prices lead to rise of alt-right in Canada? but recently I came across a few articles that I thought are worth sharing.

Soaring House Prices Could Mean A New Kind Of Aristocracy: Economists

“The bar is being raised further and further,” he said in an interview. “At these prices [the housing market] is only open to people who have generational wealth.”

He says there is a risk that home prices will continue to rise until it’s not even possible for most people to save up for a down payment. If trends don’t change soon, that could be the case in Toronto and Vancouver. It now takes twice as much time to save up for a down payment in those cities, compared to their average since 2000.

“Parents will only be able to help if they themselves are wealthy homeowners, so you could have a landed wealth-owning class perpetuating through the generations. At that point being born into the right family matters a lot,” Rashbrooke said in an email to The Huffington Post Canada.

Soaring house prices have led to a “massive misallocation of resources,” Eaqub said. As more and more money is concentrated in the residential real estate market, it leaves less money flowing around for other kinds of investment.

In Canada in recent years, housing investment soared while business investment plunged off a cliff after oil prices fell…. mortgage lending went from being less than eight per cent of bank assets in the early 1970s, to more than 40 per cent today.

This is exactly what I pointed out in For Canadian GTA and GVA residents, the American Dream is dead.

Solution usually pitched by experts is to make renting attractive or at least remove stigma from renting. I grew up in a rented apartment so I don’t mind living in a rented space with my family. But Canadians have one of the highest home ownership rates in the world and hence look down upon renting. What we need is an decent quality rental product but land prices are so high, it only makes sense for builders to build high end rental products and we are back to square one.

Builders flock to high-end rental development

In the past two or three years, executives for Minto, the Ottawa-based apartment developer, have spotted an opening in a market that had seemed all but moribund for years, even decades.

Those opportunities, as it turns out, were hiding in plain view, in the form of the sprawling open spaces at the bases of some of Toronto’s 1960s-vintage apartment towers.

Martin Tovey, a Minto vice-president, points to an infill project in Don Mills that’s on the verge of securing council approval –200 stacked townhouses, to be situated on the largely unused grounds of a three-building apartment tower complex at York Mills and Leslie. Minto purchased the properties a few years ago.

The spacious, newly-built units — each over 1,100 sq.-ft — will come in two- and three-bedroom versions. They’re close to schools, parks, transit and shopping.

And this twist: they’re rentals that will lease for about $2,000 a month.

This gentrification of neighbourhood can also impact schooling as it is affecting in Washington, DC.

How exclusionary zoning limits poor families’ access to good schools

….wealthy neighborhoods around the US ban rentals, multifamily housing, and smaller homes through regulations like zoning. This excludes lower-income families by outlawing housing they could afford.

Because school attendance zones tend to follow neighborhood boundaries, exclusive neighborhoods have spawned increasingly economically segregated schools.

The average low-income student lives near a school that scores at the 42nd percentile on state exams, while the average middle-to-high-income student lives near a school scores almost 20 percentage points higher.

Part of the reason: housing costs are almost two-and-a-half times higher near high-scoring schools. Home values are $205,000 higher in the better-scoring areas, the typical home has 1.5 more rooms, and the share of rentals is 30 percentage points lower.

The Price of Australia’s Real Estate Boom

Australia is entering the third decade of a real estate boom that has altered the national psyche. Over the past 30 years, housing prices have risen 7.25 percent a year, leaving the country with some of the most expensive real estate in the world. In the third quarter of this year, real estate prices in major cities rose 11.2 percent on an annualized basis, dashing some experts’ predictions that they were starting to taper.

The rising property values of the last 30 years extinguished economic diversity in Balmain, which is now filled with Sydney’s elite: lawyers, doctors and bankers who built or bought spectacular houses with views over one of the world’s great harbors. The old power station may be converted into offices for Google.

Australia’s broad welfare system and high taxes ensure that those who don’t own homes have decent medical care and access to state-run schools and colleges. Few homeless people are visible on the streets. Following and predicting interest rates have become the national pastime.

Among the 48 percent of Australians who don’t own homes, women over 50 years old are the most vulnerable. When the researchers Susan Thompson and Peter Phibbs interviewed renters for a study a few years ago, they found the cost of property was contributing to malnutrition.

Elderly women, who are more likely to rent because lower wages meant they couldn’t save as much as men throughout their lives, were paying their landlords first and utilities second and buying food last. “They were eating slices of white bread with all they could find on the last few days before pension day,” Mr. Phibbs said to me this month. “That’s depressing in a rich society.”

Liar Loans are common in Toronto residential real estate

But as long as the music is playing, you’ve got to get up and dance

Canada or at least Vancouver and Toronto area is facing a housing affordability crisis. I have written about it many times earlier

For Canadian GTA and GVA residents, the American Dream is dead,

Worry about Canadian real estate but don’t lose sleep over it — CMHC

Predicting Minsky moment for Canadian housing

so I will not reproduce the charts again. However, whenever discussing it with banks or regulators, their response can be summarized as:

Unlike US banks in 2008 and earlier, Canadian bank’s are well capitalised and lending standards are stronger so Canadian real estate debt is not like US pre-2008

Since they have a much better overview of the industry than myself, I took their word for it. The only kink I saw was a personal anecdote which I wrote in Unintended, or intended, that is the question but one anecdote does not a statistic make

I asked a real estate broker what will be the consequences of the new mortgage rules. His reply, “Don’t you worry about it at all. You tell me which house you want to buy, I will arrange for you to qualify under the new rules.”

As I was looking for a rental place, I didn’t probe further as how will he make me qualify. I should have satisfied my curiosity.

Then I came across tweets of @mattintoronto and he had some interesting tit bits to share

Again it is anecdotal but every time I used an Uber in Milton, driver tried to sell me a condo where he is either acting as a broker or is the owner. Same goes for driving instructors as heard from many of my friends.

But what I found scary in the above tweet was the [fake] Notice of Assessment that were being used to qualify. It reminded me of the whole LIAR loans and Countrywide saga that played a significant role in the US subprime crisis.

I presumed that what Matt was highlighting was something new but bit of googling revealed that it is pretty prevalent in Canada

This was published last year by @tamsinrm but seems no one cares

How mortgage fraud is thriving in Canada’s hot housing market

Those in the industry agree that much of what constitutes mortgage fraud in Canada is what’s known as “soft fraud” or “fraud for shelter” and usually involves people who are genuinely looking to buy a home and pay their mortgage, but can’t quite qualify for a conventional loan.

In some cases borrowers are simply trying to buy a home that is out of their reach financially. In others, the borrowers could qualify if they had a bigger down payment and paid a higher interest rate, but instead alter pay stubs and bank statements in order to qualify for the cheapest possible mortgage. Still, more involve people like Mr. Dhaliwal, who forge documents in order to save a deal that is up against a tight deadline.

Soft fraud? I didn’t know there are two types of frauds. Anyway, one shouldn’t ask the realtors or the bankers what do they think because they come up with this

Broker Mr. Cashin blames overly stringent federal rules governing insured mortgages, such as shorter amortization periods and higher mortgage insurance premiums, for making it harder for average Canadians to get a mortgage, especially in expensive markets like Toronto or Vancouver.

Such policies are aimed at ensuring the housing market didn’t experience a catastrophic U.S.-style meltdown. Mr. Cashin argues that they have had the opposite effect, pushing otherwise creditworthy borrowers who would have qualified for a conventional mortgage in the past into riskier areas of the market, including to industry professionals willing to commit fraud to get a deal done at all costs.

“They’re creating an environment for people to cheat because they want those low rates,” he says. “A lot of times it’s because they need it. House prices are going up. Everything is going up except people’s wages, but policy is keeping the cheap money away from the people who need it the most.”

Others say the driving force behind mortgage fraud is to help clients who have the means to afford the mortgage, but who work for cash or otherwise aren’t declaring all their income. That might make them tax cheats, but it doesn’t necessarily put them at higher risk of defaulting on a mortgage.

“If I feel a client can afford it, I’ll help them and guide them,” says one Toronto mortgage broker who spoke on condition of anonymity because he admits he helps clients fake job letters, income documents and employer phone references.

“Yes it’s fraud. But we are looking out for the bank. We are looking out for the economy in that we’re not giving the mortgages we know are going to screw up,” he says. “I will stop clients and deals that I know are headed for trouble because it’s not healthy for anybody.”

Home Trust CEO Gerald Soloway told an analyst conference call earlier this year that the mortgages it had flagged for fraud were actually performing better than the company-wide average.

So yeah, liar loans in Toronto are pretty common, wide spread and business as usual. The new element that was highlighted by Matt in his tweets was Borrowers getting additional loans from alternative lenders secured by secondary mortgage which the first mortgage holder doesn’t know about.

If my loan is secured by a 2nd mortgage, I would want a piece of action either in the form of higher interest rate or shorter loan term. It would be interesting to find out these things about the 2nd mortgage but if it has a higher rate or shorter term, it promotes flipping and not ownership.

Yeah…well…ok…hmm… no one cares except for a few twitterati. In the now infamous but immortal words of Chuck Prince (CEO Citibank)

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”

Canadians can look forward to stagnant or decreasing wages in future

Canada To Lose Up To 7.5 Million Jobs in 10–15 years

I rarely watch TV but read a lot of articles, blogs, magazines etc on the topics I am interested in. However, most of the times when someone asks me to tell me what my thoughts are or what my research says about a particular topic, my memory fails me and I can’t even remember where and what I read about that topic. But on rare occasions, I read a passage or an article and it is as if someone has opened the floodgates of my minds and all the writings I have read start falling into place like the blocks in the game of Tetris.

It happened yesterday when I read the Huffington Post article about Canadian real estate and was easily able to collect all that I have read in half an hour and present it as For Canadian GTA and GVA residents, the American Dream is dead. Today I read another piece, again in HuffPo, and it brought back a torrent of ideas. This is what HuffPo piece started with:

Canada should consider radical changes to its social safety net as the country faces the loss of up to 7.5 million jobs to automation in the next 10 to 15 years, says a new study from a think tank at the University of Toronto.

There are academics mainly in economics who think that as industrial revolution eventually created more jobs than it destroyed, eventually this new phase will too. But these are feeble attempts at trying to fit the earlier experience on the tech future. However, if one has read the published work that is coming out, predicting the future of jobs isn’t as simple as that. I will cite two works that have received a lot of coverage.


One, the acclaimed 2014 book The Second Machine Age by two thinkers on the forefront of automation ie MIT professors Andrew McAfee and Erik Brynjofsson.

Most important, humanity has recently become much better at build­ing machines that can figure things out on their own. By studying lots of examples, identifying relevant patterns, and applying them to new examples, computers have been able to achieve human and super­human levels of performance in a range of tasks: recognizing street signs, parsing human speech, identifying credit fraud, modeling how materials will behave under different conditions, and more.

Building machines that can learn on their own is critical, because when it comes to accomplishing many tasks, we humans “know more than we can tell,” as the scientist and philosopher Michael Polanyi put it. Historically, this served as a hard barrier to digitizing much work: after all, if no human could explain all the steps followed when completing a task, then no programmer could embed those rules in soft­ware. Recent advances mean that “Polanyi’s paradox” is not the barrier it once was; machines can learn even when humans can’t teach them.

As a result, jobs that involve matching patterns, in particular, from customer service to medical diagnosis, will increasingly be performed by machines. Because U.S. companies are both the world’s most prolific producers and the world’s most enthusiastic consumers of technology, many of the effects of the digital revolution will likely be seen first in the United States. Low-wage jobs are especially at risk: in its 2016 report to the president, the U.S. Council of Economic Advisers estimated that 83 percent of jobs paying less than $20 per hour could be automated.

Most of the economist think that humans will follow the same path as they did during industrial revolution ie as they shifted from farm labor to industrial labor similarly they will shift from industrial labor to tech workers. One has to only look at Detroit (car manufacturing capital of the world) to realize that jobs once exported or automated are gone to never come back. The path of transformation of work will not be from the farm worker to industrial worker but rather of horse to car. Humans will go the way of horses and may no longer be required for work.

The Economist

More recently, Ryan Avent of The Economist newspaper (it is a weekly magazine but they call themselves a newspaper) published The Wealth of Humans: Work, Power, and Status in the Twenty-first Century. He was interviewed in The Atlantic monthly few months ago and the initial title of the article was The Next Industrial Revolution Could Put Millions Out of Work which they later made less alarming

I think the digital revolution is probably going to be as important and transformative as the industrial revolution. The main reason is machine intelligence, a general-purpose technology that can be used anywhere, from driving cars to customer service, and it’s getting better very, very quickly. There’s no reason to think that improvement will slow down, whether or not Moore’s Law continues.

I think this transformative revolution will create an abundance of labor. It will create enormous growth in [the supply of workers and machines], automating a lot of industries and boosting productivity. When you have this glut of workers, it plays havoc with existing institutions.

To a different question about increasing a minimum wage (the bottom rung of the workers) he says

It will be interesting to see how increases in the minimum wage affect this. You see stories of robotic burger-flippers and people ordering food through iPads. It’s possible you see more of that as minimum wages rise. It seems like there is technology waiting on the shelf to displace that work.

I think I would say: If in 10 years time, workers in those jobs have received a substantial raise relative to current levels, and employment has not fallen, and productivity has not gone up, that would be evidence that I’m wrong. But my expectation is that as these workers become more expensive, you’ll see more interest in the technology that could displace them.

Joseph Stiglitz Nobel Laureate

Nobel laureate Joseph Stiglitz in his latest working paper for NBER which was published last week stated that future is about jobless recoveries. Though he was talking about monetary policy and low interest rates, but this excerpt fits nicely into our theme.

(c) Choice of technique/creating a jobless recovery

Here, we discuss one piece of evidence that reliance on changing intertemporal prices for equilibrating the economy may not be optimal. There are many alternative theories attempting to explain why the economy fails to attain full employment, including those related to wage and price rigidities (with those rigidities in fact being endogenous in some variants of these theories.) Monetary policy attempts to correct for these distortions by controlling the interest rate (usually the short term interest rate), setting it at a level different from what it otherwise would be. But intuitively, if the source of the distortion is in the labor or product market, it might make far more sense to attempt to correct at least some of the distortion more directly.

The standard argument for monetary policy is that it increases investment (and possibly consumption) leading to higher GDP and thus employment today. But there is another effect: lower interest rates induce firms to invest in more capital intensive technologies, lowering future demand for labor. It affects the choice of technique. Even if real wages go down in a recession, the decline in the cost of capital is every larger. The original distortion is an excessively high price of labor relative to capital because of wage rigidities; the interest rate policy exacerbates that distortion. We see the consequences: firms replacing unskilled checkout clerks and tellers with machines. Thus, as the economy recovers, there will be a lower demand for labor than there would otherwise have been — it will take a higher level of GDP to achieve a restoration of full employment.

Gig Economy

Though a lot of people talk about “gig economy” and how Uber and Task Rabbit are creating jobs that provide “flexibility” and “additional source of income”. Brookings Institution came out with this

Is the Gig Economy Cannibalizing or Creating Jobs? Here’s Some Early Evidence.

To be sure, a first reading of the data lends credence to the view held by enthusiasts of the “sharing” economy that Uber and Airbnb are serving unmet consumer demand or stimulating new demand — and so are creating new work opportunities that complement those in existing taxi or hotel companies. You can see that in our data, which show that both nationally and in most of the 50 largest U.S. cities, payroll employment has actually increased somewhat in those industries during the years 2010–2014, even despite the influx of nonemployer contractors working for Uber and Airbnb.

However, payroll growth in the two industries looks surprisingly weak by our count. And I believe that a closer look at the metro-by-metro data suggests that platform freelancing was already substituting for some payroll employment and cannibalizing it in the 2012–2014 period.

New Social Contract

All of the authors cited above, including the researchers at University of Toronto that started this conversation, go on to say that this jobless future calls for a new institutions to provide a safety net. I quote from Brookings Institute piece below and though what they are saying is about gig economy workers, yet it also holds true for those made redundant by automation.

the shift to alternative work arrangements matters for policy makers because it represents a fundamental reorientation of the social contract within which millions of Americans work. Most notably, the rise of online temping, freelancing and independent contracting means that millions of workers increasingly lack access to the once-ubiquitous labor standards that defined the “good jobs” economy that came out of the New Deal era. Gig workers, for example, retain limited access to income security protections, such as unemployment insurance, workers’ compensation and disability payments. Minimum-wage and antidiscrimination laws may not apply to such contractors, nor do they often receive retirement benefits such as Social Security. And for that matter access to credit, training and credentialing becomes even more tenuous than elsewhere in the economy.

In short, the expansion of the gig economy — left to itself — is likely going to contribute to larger trends that are reducing the share of American workers that can achieve basic economic security through their work.

Given that, the question becomes not just whether the gig economy will supplant large portions of the payroll economy, but how can the technological and business-model innovation of the gig economy be managed and enhanced to ensure it helps deliver a measure of economic security for the millions of Americans who are beginning to depend on it? Whether it is about benefits contributions by gig-economy companies, portable benefits accounts, or new kinds of safety nets, the conversation needs to widen as fast as the gig economy is growing.

How unsafe you are in the so called gig economy? Very unsafe.

Many in tenured track positions in academia or press may not be able to see the future, but Canadians are worried about their employment prospects.

Low Quality of Jobs created in Canada

Below is the same data I presented yesterday regarding housing affordability but it is also equally applicable to today’s post. From CIBC research report

Is the quality of employment in Canada in decline? We think so. By looking at the distribution of part-time vs. full-time jobs; self-employment vs. paid-employment; and the compensation of full-time paid employment jobs in more than 100 industry groups, we observe a slow but steady deterioration.

As illustrated in Chart 5, the declining share of young Canadians in the labour market can bias our direct measure upward. At the same time, the rising share of older Canadians that are less engaged in the labour market can bias the measure downward. Chart 9 overcomes that problem by focusing on the age group between 25 to 54. The story is the same: The share of lower-paying jobs has been on the rise.

For Canadian GTA and GVA residents, the American Dream is dead

It is Generation Squeeze alright

Expensive Detached Homes

The title is from the closing sentence of article Your Kids Will Never Own A Single-Detached Home by Ben Myers, SVP of Fortress Developments. I would have presumed that since he works for a condo developer, he wants to use the article to nudge you to buy a condo. However, despite its scare mongering title, it actually comes across as very insightful:

I consider myself lucky to have purchased a condominium apartment 10 years ago in Toronto, catching the upward price wave before it became a tsunami. Like many of my peers looking to start a family, I bought an entry-level condo townhouse after three years of small-space loft living.

On paper, my home has appreciated by $200,000 since I bought it seven years ago. I should be ecstatic, I should be jumping for joy at my financial windfall. However, strangely, I have not done any joyful jumping whatsoever; like many people in my situation I am stuck on the property ladder.

Despite the substantial increase in the value of my townhouse, single-detached homes in my neighbourhood have increased by $500,000 during the same period!

My kids want a back yard (and so does my dog), but I don’t want to double or triple my mortgage for a piece of grass and a couple extra feet between me and my neighbours.

Over leveraged Home owners

Below is from PWC’s Emerging Trend in Real Estate 2017 report #ETRE17

The prices are so out of reach for average household that despite making a hefty 25% down payment and a 25 year amortization, you still cannot afford to own a home at average price as most of your income will go towards making mortgage payments.

Ben is being conservative and cautious here as he is not doubling or tripling his mortgage. But are other GTA and GVA residents as conservative? Below is from DBRS report that I have reproduced in my earlier posts too

One indicator of the stress on home buyers from rising house prices is the high level and continued increases in the proportion of all insured mortgages that have loan-to-income ratios (LTIs) above 450%. The proportion of these high LTIs has been rising across all metro areas in Canada, particularly in the GTA and GVA (see Exhibit 3)

GTA and GVA residents are going deeper and deeper into debt to get on the property ladder to buy that coveted single family detached home.

Expensive Condos

So if you can’t buy a single family detached house, you can buy a condo in a high rise. But condos aren’t cheap either and getting more expensive by the day

According to President of Bild,

“The recent increase in high-rise prices can be attributed to the rise in average suite size, combined with a growing price per square foot,” Tuckey said. “This year we have seen the introduction of larger suites aimed at purchasers who have been priced out of the low-rise market.”

It is not only that condos are getting expensive to buy, occupying the newer construction with amenities such as gym, sauna, roof top terraces acts as a double whammy because of the recurring maintenance charges which may make sense for a young professional or a couple but for someone starting a family or becomes un-affordable. After buying a condo, paying up to $500 per month in maintenance changes is not my idea of affordable.

Questionable Marketing

Then there are condo builders trying to come up with creative solutions to get the people on property ladder. Though Ben disagrees with me on this but I find the following dangerous. If the person can’t even afford the 5% down payment of a condo, why get him enticed. When the time comes he may not even qualify for a mortgage or a slight change in interest rate may cause his to default on his payment.

New development in Victoria offers creative down payment structure

Tomaszewski wants to make home ownership possible for people who are finding it hard to reach that down payment threshold.

“I remember what it was like,” said Tomaszewski. “I had a good job and a family and I wanted to buy my first house, but there was no way I could get together a down payment for the longest time. I want to help people in that situation.”

His solution is a competitive pre-sale purchase incentive that will allow buyers to enter the market with no down payment.

Potential buyers will be able to secure a unit with no money down by making interest free monthly payments now which will add up to five per cent of the value of their selected unit. When the project is completed at about Christmas of 2018, buyers will be able to apply those funds to the purchase price and enter into a regular mortgage situation on their unit.

The report goes on to state that

It’s an opportunity that caught the attention of Jeremy Evans. He’s been looking for a place of his own for just over a year and, despite being employed and saving some money by presently living with his parents, the challenge of raising the lump sum down payment required for a home purchase has been daunting.

And finally

The four storey building will have a central courtyard, complete with its own orchard. Each unit will also be assigned a rooftop garden space where wildflowers, herbs or vegetables will be grown by virtue of a specialized water system for irrigation.

To complete the picture, Tomaszewski has included a rooftop sauna and an apiary to house bees to help pollinate the orchard and gardens.

You have got to be effing kidding me. The guy can’t afford the 5% down payment and he is going to be able to afford the maintenance expenses of a sauna, an apiary and specialized water system for irrigation.

But most of my rage is reserved for this one (which I have already shared in my earlier post) with thanks to @stephaniefusco on twitter

Scare mongering people into securing the kid’s real estate dreams? I can’t even afford a condo for myself much less think about buying a condo for my kid. I wonder who is going to pay the maintenance charges for that condo till my 7 year old grows old enough to realize this dream. I also wondered what “secret strategies” were revealed in that seminar presented by a condo builder, a mortgage advisor, a real estate lawyer and…. wait for it….. a pre-construction condo adviser (is that even a thing?)

Squeezing the Middle Class

OECD came out with its economic survey today stating that increased house prices in Canada are squeezing the middle class

Low interest rates have encouraged further increases in household credit, with household debt continuing to edge up from already high levels. Canadian house prices have risen sharply, especially in Vancouver and Toronto, and housing investment is unusually high as a share of GDP, posing vulnerabilities and squeezing middle-class families in these high-priced markets. In response to these developments, the authorities have deployed some targeted macro-prudential measures, but further regionally focused measures should be considered.

Politicians talking the talk, but not walking it

And though the politicians do talk about affordability, their interest really isn’t in it. Swayed by the likes of Richard Florida of the infamous Rise of Creative Class and their own self interest, their actions don’t walk their talk. As summarized in a Harvard paper

Law and policy at multiple levels of government play a sizable role in all matters of housing affordability. The tax code, for one, is fundamental to enabling and constraining housing initiatives. Most cities rely heavily, if not exclusively, on revenues from property taxes, but many do not have the power to set property tax rates. That power typically rests with the state. Local politicians seeking to increase revenue streams to fund social services have but one practical means at their disposal: Increase property values to drive up tax revenues (Goldsmith & Blakely 2010, Nelles 2013). As Frug & Barron (2008) have argued convincingly, under these legal constraints gentrification becomes necessary for local politicians of any persuasion. Social scientists often present gentrification as something that happens to this or that transitioning neighborhood and explain it by referencing economic and sociological dynamics. But a more expansive approach would analyze how tax policies incentivize, even force, local politicians to court gentrification on a much larger scale.

So far, have yet to see any tax policy etc from Canadian government that is effective or even goes some way towards bringing affordable housing to Canadians.

Not a real estate bubble

I won’t go as far as to call it a real estate bubble because I have seen people calling it a bubble for last 6 to 7 years and frankly speaking it can be very exhausting calling for the bubble to burst at every news item showing rising house prices or increased indebtedness. As the OECD chart above shows, that increase in indebtedness is tapering off. However, I do agree that it is a affordability crisis.

Stagnant Income

But there are two elements of affordability. One is the house price. Other is your income. Even if the house price is increasing, if income of Canadians is increasing at a higher rate, there is still a chance that one day it’ll become affordable. Unfortunately, there isn’t any positive news on that front either. CIBC released a research report today (I recommend reading the full report for the caveats, assumptions and methodology but below I summarize a few points)

Is the quality of employment in Canada in decline? We think so. By looking at the distribution of part-time vs. full-time jobs; self-employment vs. paid-employment; and the compensation of full-time paid employment jobs in more than 100 industry groups, we observe a slow but steady deterioration.

As illustrated in Chart 5, the declining share of young Canadians in the labour market can bias our direct measure upward. At the same time, the rising share of older Canadians that are less engaged in the labour market can bias the measure downward. Chart 9 overcomes that problem by focusing on the age group between 25 to 54. The story is the same: The share of lower-paying jobs has been on the rise.

Generation Squeeze

House prices are increasing and low wage paying jobs are on the increase. Hence, the current and the next generation in the words of OECD, is getting squeezed. I really like the term Generation Squeeze and this is how the advocacy group describes the situation

As younger Canadians finish school, begin careers, look for homes and start families, we are squeezed by stagnant incomes, high costs, less time and mounting debts (including a deteriorating environment) — even though our economy produces more wealth than ever before. While governments use this wealth to adapt policy for others, including our aging population, they continue down a path that leaves less and less for younger generations.


Yep. We are Generation Squeeze alright.