Thank you, Chair.
Thank you for the invitation to appear here today.
I've undertaken extensive research in this area and published a number of papers, including one this summer in Housing Finance International. I've provided links in my brief.
I was invited only last Thursday, so I don't think you've received the brief yet. I think it will be forthcoming once it's been translated.
I'll hit some of the highlights in the brief quickly here.
First, on the issue of home prices, prices don't go up in a vacuum. They go up because consumers and investors drive them up, and they're enabled by facilitating financial conditions.
Over the last 20 years, we've seen a relatively steady growth in incomes and a very significant decline in mortgage interest rates, which together act to increase, for every dollar of earning, the amount people can borrow. It actually has been increasing over that period of time. It's a phenomenon I refer to as the “leverage effect”.
In the brief, I have prepared some charts. When you track the amount of money people can borrow at the prevailing interest rate and the prevailing median income each year and compare that with the actual MLS composite home price, they actually track almost in line. We've actually seen home prices match the capacity of the median household to pay, although not necessarily all households. It was very significantly enhanced by the decline in interest rates.
In short, prices went up because consumers and investors had the capacity to drive them up, at least until spring 2022, when we saw the bump-up in interest rates.
Another important thing that happened during this period was significant appreciation. Appreciation begets more appreciation. Those owners who already had a home had a significant growth in their wealth. Two-thirds to three-quarters of buyers are existing owners, and they're using their existing built-up equity to bring to their next purchase, whether it's for themselves or for an investment.
Essentially, what we have are people with a significant amount of equity, or bags of money, bringing that to real estate deals and competing with first-time buyers who do not have the same level of capacity to buy. It really is creating an inequity between the two groups.
When we see this increased capacity to pay and the enhancement of equity in combination with what we saw during the COVID period of a very reduced inventory of homes for sale, the obvious result is an escalation in home prices.
First-time buyers have been increasingly challenged by these high prices. Also, they are the victims of public policy. Macroprudential policies that have been introduced have constrained access to credit and prevented young families from getting into the housing market.
Really, policy has targeted the wrong actors in the system. Instead of constraining the inflationary behaviour of repeat buyers and investors, it punished first-time buyers. I think we need to review and refine some of the policies, including consideration of a tax on windfall gains from excessive sales proceeds to suppress that capacity to pay.
Turning quickly to renters, in the decade from 2011 to 2021, the home ownership rate in this country peaked in 2011 at 69% and went back down again to 66.5% in 2021. If the rate had stayed at 69%, 400,000 renter households would have become owners, and that would have taken significant pressure off the rental market, but because they couldn't access ownership, that pressure stayed in the rental market. It's been augmented by very significant increases in immigration, particularly from international students and temporary foreign workers, which is a relatively unmanaged part of the immigration system and distinct from new permanent residents. The combination of that million and the 400,000 is a significant amount of demand, massively reducing vacancy rates and driving up rents.
The critical policy issue in this area is not so much a federal one; it's a provincial one. It is the rent regulations, which allow vacancy decontrol in pretty well all provinces. With massive pressure and the ability to push up rents on vacancies, we're seeing these double-digit increases in rents in most of our cities.
While expanded supply is absolutely necessary to meet increasing demand from population and household growth, in the short term it's an ineffective solution to address the issue of affordability. We can't really build a house for four years, so there's not really going to be help coming in the short term.
Alongside those longer-term solutions, we need short-term, immediate policy change and initiatives. This includes managing population growth more carefully, particularly student visa levels, and rethinking rent regulation and the mechanism of vacancy decontrol. While a provincial jurisdiction, there's historical precedent for the federal government to encourage the provinces to revise their rent regulations, as they did in 1975. We had high inflation back then as well.
In the brief, I identify five specific recommendations that the committee could consider. I don't think I have time today to speak to those, but I'm quite happy to come back to them in the question period.
Thank you very much.