Josh Gordon, an assistant professor at Simon Fraser University’s School of Public Policy, spends much of his time researching the Canadian housing market. He doesn’t like what he sees. In a recent policy paper, he argues that Toronto’s rapidly increasing housing prices are being driven not by a lack of available housing, but rather by overwhelming, scorching-hot demand, as buyers race to acquire property before it’s no longer affordable. If he’s right, that means Toronto’s real estate market is being held aloft by buyer optimism, rather than genuine scarcity, leaving it vulnerable to a sudden downturn. We spoke with Gordon about the dangers of investing in Toronto housing, and what politicians can do in order to bring prices back to earth.
For those of us who never took Econ 101, can you just briefly explain what we mean when we talk about supply and demand in the housing market?
There are a couple ways of thinking about that. The most typical is this idea of, “Are we building enough?” But the other big concept is what’s known as “supply elasticity,” which is essentially a measure of how easy it is to build new units of housing. When it’s expensive to build homes—either because of geographic constraints like water and mountains, or zoning restrictions, or regulations of one sort or another—we say that a housing market is inelastically supplied. The literature is quite clear that elasticity has some impact on prices, but it’s not nearly sufficient to get to the kinds of prices that we see in Toronto.
What does the media get wrong about the housing markets in Toronto and Vancouver?
Most reporters speak to people from the real estate industry—who, in most cases, have a vested interest in presenting a certain view of the market. This is a big problem, because real estate agents claim that Toronto has a housing supply problem as a way of making price increases seem inevitable, when in fact it’s a demand problem. It’s like people disagreeing about the shape of the earth.
So you’re comparing realtors who argue that Toronto has a housing shortage to flat-earthers? Is the evidence really that compelling?
Yes, yes, yes. Let’s put it this way. The banks are aware of this issue, and they’re concerned. They have a fair bit of money on the line when it comes to getting the diagnosis right. And they are very clearly saying that this is about extremely strong demand. They have slightly varying takes on what’s driving it—whether it’s speculation, whether it’s foreign money, whether it’s interest rates or whatever—but very few of them are suggesting that it’s largely about supply.
Realtors are always complaining that there aren’t enough listings to go around. Isn’t that hard evidence of a lack of supply?
Only in a very narrow, misleading sense. For a long period of time, new listings in Toronto were fairly steady. What has been drawing down active listings is that in the past three years or so there has been a huge spike in sales. Last year was a record year in terms of sales. That spike has taken a bunch of the inventory off the market, which tends to push up prices. Once prices start to rise, people think, “Wait a second. Maybe prices are going to continue to go up.” As a result, a lot of people are now holding off listing their properties, because they think that prices are going to continue to escalate. And so you have this self-reinforcing dynamic. It’s demand-induced scarcity, and it’s extremely powerful.
How exactly does demand for housing get so out of control?
I believe that public authorities have underestimated the role of foreign capital. The key thing is that it’s not all about the citizenship of the buyer. It’s about where the money was accumulated. There is a ton of money that is flowing into the Toronto market from overseas, both through foreign buyers, and through people who are now permanent residents or citizens, who have access to capital from overseas. The market surged in 2015 and 2016 because you had people moving money out of China. That spurred a spike in purchasing from overseas, which drove sales up. As soon as prices start to increase, you get the local buyers jumping on the bandwagon, because they’re fearful that prices are always going to go up. That creates these scorching demand conditions.
TREB has released data suggesting that the number of foreign buyers is very low. Why believe you instead of them?
Realtors have resisted efforts to get the government to collect data about this. In Vancouver, realtors said foreign buyers were five per cent of the market. When the government went out and collected the data, it was closer to 13 per cent of buyers. So we have seen that realtors are not exactly being open and candid when it comes to their estimates of foreign buyers.
What do you think would happen to the Toronto market if we had accurate data about foreign buyers?
People would not ignore it. I think that’s another one of the lessons from Vancouver. In the five-week period when the BC government was collecting foreign buyer data, over a billion dollars was spent on Vancouver real estate by foreign citizens. The pressure mounted pretty quickly on the government to address that, especially in the context of a housing crisis. People don’t ignore it. That, in my view, is part of the reason the Ontario government has delayed collecting data for so long. If this was a government that was serious about tackling this problem, they would have been gathering data a long, long time ago.
In your paper, you talk about a couple possible policy solutions, but it seems like the one you like the best is the idea of a property surtax. Can you explain what that is?
The basic idea is to have an annual property surtax that applies on properties over a certain threshold in value—something like $800,000, or $500,000, or $1 million, depending on what policymakers choose. And the surtax would only apply to value above that threshold.
The main thing is that you can refund the amount of surtax that is owed based upon income taxes that have been paid. And so that means people who are working locally and paying Canadian income taxes on a consistent basis are going to be exempt from the tax, while those who own property on the basis of foreign income or wealth will be hit by it. That reconnects the housing market to the local labour market. And that would be extremely powerful. The surtax acts as a filter. It doesn’t affect the kind of money that you would want invested in the real estate market, and it discourages the kind of money that you wouldn’t want. It also would tend to discourage speculation.
So it’s a less blunt instrument than a blanket tax on foreign investment. You’re not catching foreigners who are actually working here and paying taxes.
Yes. It’s also more comprehensive. A large issue is not citizenship but participation in the local economy, and where the money for purchases is coming from. This would deal with that problem.
Right. Because the surtax would theoretically even hit a Canadian living overseas—somebody who happened to be living in the Cayman Islands or something, who wasn’t paying Canadian income taxes.
Yes, although you would exempt seniors in various ways—especially seniors who had paid into the CPP a certain amount. If you’d paid a certain threshold of income tax, you would then be exempt from the tax moving forward, which would cover somebody who had made a lot of money 10 years ago and paid a bunch of income tax on that, then bought a house on that basis.
This all makes sense. Even so, I can’t imagine a world where first-time buyers are less frenzied than they are. You write about this “fear of missing out” that drives the lower end of the market. Is there any policy measure that can control or lessen that, or will it always be with us?
No, I don’t think it will always be with us. It’s very much a product of the kinds of housing markets that have gotten out of hand in Vancouver and Toronto. You don’t see this “fear of missing out” craziness in other Canadian cities. Once you create expectations that prices are likely to come down—and certainly the surtax idea would do that—then you change the mindset of young buyers and you have a very different market.
Can I ask how old you are?
Sure. I’m 34.
And you live in Vancouver. Do you own property there?
I do not. But my parents do, and I’m an only child.
Intellectually you know that the market is not a reasonable market right now, but have you ever been tempted to get in anyway? How close have you come to actually putting a down payment on a place?
Ah, not close. But I do have moments of self-doubt about the market. And if I’m doubting myself when I have all this data in front of me, that just shows how easy it is for people to get caught up in this. That’s what’s so dangerous and upsetting to me: that there are a lot of people who will get caught up in this, and our governments are standing by and allowing it to happen.