The flight to the suburbs has become all the rage these days. Since the onset of the pandemic, there has been a mass migration out of dense urban cities and into the sprawling suburbs. The ability to work from home, while providing more space, at a more affordable price point, has become irresistible for many. While the shift in home buyer preferences has been garnering plenty of media headlines these days, the reality is this trend was already underway. It has merely been throttled into overdrive over the past six months.
This really isn’t that hard to understand though. The cost of living has inflated over the years, far quicker than wages. An era of near zero interest rates, combined with a decade of quantitative easing has pushed asset prices through the roof, including housing. Remember, a key function of quantitive easing is to push asset prices higher. As defined by the Bank of England, “QE works by making it cheaper for households and businesses to borrow money – encouraging spending. In addition, QE can stimulate the economy by boosting a wide range of financial asset prices.”
This has forced homebuyers, particularly younger ones, further away from expensive cities, not necessarily by choice, but rather, in order to qualify for a home and gain access to the property ladder. Everyone in Canada has been trained that house prices only go up, because, despite what politicians might say, rising house prices are essentially a political necessity. They are what’s needed to keep the game going, and to keep tax revenues growing. Political dialogue surrounding housing affordability is merely lip service to attract young voters.
The reality is Governments could easily create more affordable housing prices tomorrow, but they choose not to. Raise interest rates from zero to 3%, and cut leverage ratios in half – and voila! A sharp drop in home prices, and utter destruction to a Canadian economy hooked on real estate. In other words, there is no simple solution.
Instead, the game must go on, as it’s seemingly much more palpable to kick the can down the road. Governments ultimately sew the seeds of their own demise.
Look no further than the city of Vancouver as a prime example. While they pretend to fight for increasing affordability, in the past month alone they’ve decided to triple the empty homes tax, raise property taxes, make all street parking permit only, AND are attempting to install tolls for driving in the city. It doesn’t take a genius to figure out this will only exacerbate the exodus to the burbs and dig the city further into a financial hole. Raising taxes during the sharpest recession since World War 2 has to be quite simply the most idiotic thinking possible.
Thankfully for the city, we will get a vaccine soon, and that will slow the urban exodus. However, the structural impairment of housing affordability will continue to push people outwards, it is simply impossible to stop.
Short the city, go long the suburbs.
Three Things I’m Watching:
1. Sales growth has been strongest in the suburbs during the pandemic, by a wide margin.
2. Average property taxes in the City of Vancouver are set to rise 5% in 2021.
3. Canada’s household savings rates surge thanks to massive fiscal stimulus.