We’re not only in a pandemic, but we’ve also got a national housing crisis on our hands. Due to both technology and the Coronavirus, people are being left behind and losing ground in record numbers. We may see a wave of evictions like Canada has never seen. So, last year, CMHC set an ambitious goal. Provide all Canadians with homes they can afford and meet their needs by 2030.
It’s a stretch goal to be sure. Yet it’s the right goal for three reasons.
- Firstly, everything from common sense to Maslow’s Hierarchy of Needs tells us that security and personal safety come before all growth. It’s VERY difficult to make any headway in life if you’re constantly worried about where you’ll sleep at night. Fixing this in a sustainable manner (one that doesn’t require a $500,000 mortgage for someone who has just lost their job) is going to be an ongoing challenge for our country. As you’ll see, this problem is not going to go away by itself, it’s in our National interest to move on it.
- Secondly, it’s important to maintain our countries collective conscience. If we want to avoid the social strife we’ve seen in the U.S., it’s fundamental to avoid the development of an ‘Us vs Them’ mentality. As housing costs today are proportionately more costly than any other monthly expense, providing cost-effective options is in everyone’s benefit. It frees up discretionary income to be used for social spending, and yes, even higher taxes.
- Thirdly, the right housing plan with enough backing stands a chance of spurring the strong economic growth we desperately need. With housing comes hope, stability and economic growth from which we can rebuild as a nation.
Governments are tasked with the responsibility of keeping their citizens safe. It’s cold here. Making sure people have somewhere to live is perhaps the most fundamental of all needs. It’s a very Canadian ideal.
But realistically, pandemic or not, there is virtually no chance this can be achieved with our current approach to building. It’s expensive, time-consuming and mired in regulation. So here is why this initiative is so important.
As a nation, it’s entirely likely we hit a massive credit crunch over the next few years. If that happens and our interest rates spike, things will get worse, not better. So it’s a necessity that we get the economy going again. Historically, there has been nothing better than a housing boom to restart a long term economic boom.
Canada lost its AAA debt rating in June. It is just a start. We’ve got fundamental debt problems quickly escalating here in Canada. As a nation, we’re approaching a tipping point. According to the government itself, if we don’t change our economic trajectory within a few years, we may be headed for financial ruin.
The 3 fold problem
Existing debt, resource prices and the cost of social programs are all of concern to Canada’s future. Here is why.
- Canada’s provinces of Ontario, Quebec and now Alberta are amongst the most over-leveraged in North America – right up there with States like California and New York. Refinancing that debt will likely be an uphill battle and one that can be expected to cost more each and every year.
- Canada is a resource-based nation that has traditionally relied on resource taxation (primarily from oil) to augment the annual fiscal budget. But today there is a real concern that the resource taxation we could always count on may never fully come back. Disruptive changes such as fracking have made heavy Canadian oil uncompetitive and unprofitable, so much so that the majority of heavyweights have now pulled out of the Canadian Oilsands, and some traditional oil assets are now even considered ‘stranded.’ This means that they are fast-moving towards becoming liabilities that still need cleaning up vs being revenue-producing assets that can act as collateral.
- Lastly, we’ve got some of the most expensive social programs in the world (with a rapidly greying demographic to boot). This is partially due to the fact that Canada is so much more generous than other nations with both it’s bailout and social programs. We’re rapidly falling behind in creditworthiness compared to other countries, and that spread will no doubt worsen the longer we remain in recession.
What that all translates into is the potential for higher taxation and higher interest rates. In some respects, countries are no different than consumers. Fall far enough behind your peers and your next round of borrowing may cost you dearly.
The Only Four Levers any Government Has
Famed Portfolio Manager Ray Dalio has written extensively on debt crises and what we can expect from them. In his book, Big Debt Crises, he talks about how governments have only 4 options when trouble strikes. Here are the options, their ramifications and the likely way forward.
- Austerity. Cutting social spending may seem like a way to save money but doing so often makes a bad situation worse. Austerity can deepen a recession just as it did in Greece a few years back. The Federal Government has already stated that “now is not the time for austerity”, so this is unlikely to happen unless we hit a debt wall.
- Debt defaults. We’ve seen the results of governments defaulting on debt in places like Argentina and the hyperinflation this can create. This would be a last resort.
- Transfers of Wealth through Increased Taxation. Our Canadian government has already stated that higher taxes are on their way. Expect higher taxes particularly in higher income brackets. A wealth tax is also likely on it’s way. This is going to hurt. Canadians are already some of the most highly taxed people in the world with the average family paying out almost $39,000 dollars a year in taxes. (That’s based on that same family’s earnings of $91,535 dollars according to the Fraser Institute).
- Printing Money. The Canadian federal government has already spent the cost adjusted equivalent of it’s WW2 budget, since the start of the year. Newly printed money is where the majority of the stimulus is coming from. In the longer term, this approach of being the lender of last resort, and printing vs borrowing or raising the money to do so, is what is likely to cause future inflation.
The Ongoing Impact of Technology
As if all of this wasn’t bad enough, technology is and will continue to steamroll jobs. As AI takes hold over the next decade, we will feel the combination of a post-pandemic stagnant recovery combined with increasing tech-based job redundancy. Realistically, as technology eats jobs, we need to acknowledge and prepare for the probability that many Canadians are going to be increasingly poorer over the next several years. We need a different way forward. One that combines the use of our natural assets (such as Canada’s huge landmass) along with world-class technology.
Creative Destruction is Likely Our Best Approach
Many people don’t know that it was a scientist from Kodak that invented the digital camera. Rather than go all in and risk killing their film business, the company chose to ignore the invention in hope of staving off the inevitable. That didn’t turn out so well.
That process, of killing off what’s (barely) working today to save tomorrow, is called Creative Destruction. That’s what we need to do today in the housing sector in order to assure a continued equitable future for all of us.
How this can work
I’ve always wondered, if they can build a house in Jamaica, or elsewhere in the world for $10 – $25,000, why can’t we here? Sure, labor rates are higher here, but there has got more to it than that.
Our process for building is antiquated. ‘Stick building’ a house is the norm, and is a highly expensive and time-consuming process – particularly when done out in the country.
RTM housing, which involves building that same house in a modular fashion in a factory, is a more efficient yet only a slightly improved approach. It suffers from civic regulations around transporting housing within cities, something many would call extortion from utility companies charging multiple thousands of dollars in ‘powerline lifts’ in order to get a property moved from the factory to foundation. There has to be a better way.
Technology and History
I’m not a housing expert, I’m in the financial business. Like my father, I follow both technology and history. Accordingly, it makes sense to me that rather than doing what we’ve always done, we should look to both tech and history in a quest to solve our most pressing national issue. Yet we remain mired in our old ways of doing things rather than insisting or rewarding change.
What History Shows Us
History shows that the biggest housing boom in a generation occurred after the GI bill brought soldiers from WW2 home and allowed them to build homes. Fresh with new idealism and government loans, they built more housing than North America had ever seen. It led to the biggest baby boom and in turn one of the biggest economic booms the world had ever seen.
Think of it. The Canadian Government has now spent in excess of $300 Billion in stimulus. Rather than target much of that money specifically to next-generation projects, most of it has just gone to pay day-to-day bills. Don’t get me wrong. Helping out of work Canadians get through this pandemic needs to be the number one priority. But if we’re spending that amount of money, should it not be possible to invest less than 1% of it into something that might be a game-changer? As it sits, a lot of people are using their funds waiting for things to ‘get back to normal.’ This may never happen.
This is typical though. For too long, governments treated bailout programs as throwing cash around and hoping for recovery. (Eg. Build some new highways, employ some students to plant some flowers and clean up the streets). The approach may look good and it may spur on some short-term relief, but in the end, it really doesn’t work. At best, it works so poorly that many people just continue to do whatever they were doing in the past waiting for change. The money borrowed just becomes a sunk cost rather than an investment. Hope is not a strategy. We need dramatic change.
What a Change in Housing Looks Like
I’m in my 30’s with an economic/political science degree and have grown savings during my 7 years in the financial business. I could buy a huge house if I wanted. But if you talk to people in their 30’s, you’ll find that they no longer want the McMansion. That was our parents’ dream.
People my age are looking for balance. Most will gladly trade the monster home for a modest property with lower costs and the corresponding time to have a life – not just a job. We’re in a multi-year pandemic. People need the basics. So here is a specific plan for what we need to do.
Launch An X Prize for Canadian Housing
Run a massive X Prize that rewards the world’s best inventors 10’s of Millions to remake a Canadian house or series of houses. One that can be built for between $50k and $100,000. One that is purpose-built for our climate, this and future pandemics, for our regulations and our (new) neighbourhoods.
An XPRIZE is a contest that hosts public competitions intended to encourage technological development to benefit humanity. Companies from all over the world are given a specific set of criteria that typically move the bar from the existing way of doing things by 10 fold. Depending on the rules, when the winners are announced, all private companies can be invited to use the same intellectual property for the benefit of everyone.
The approach has been used for over a decade in numerous fields such as medicine, engineering and space technology with huge success. It’s proven to be an approach that leads to 10X gains over existing ways of doing things.
This is particularly executable right now because new technologies, such as 3d printing, the use of nanomaterials, material sciences, AI and Quantum computing all offer up dramatically new solutions – radically changing the capabilities of what is possible to build. We can collectively benefit from this – if done at scale.
This may not seem like a problem for many of our clients. As a company, we have attracted a client base of hard-working savers – many with their houses paid off entirely. We’ve slowly helped create small fortunes for many regular people and we’re proud of it. So it’s easy to fall into the thought pattern of “it’s not my worry, I don’t need to think about it”.
But we do need to think about it if we want a Canada that is able to improve upon itself over the next 25 years, just as we have done over the previous 25.
I’m not particularly worried about my personal future. What does worry me is the state of our collective finances, and what ramifications will result if we as a country do not make some substantive changes. A large scale national housing program that makes homeownership accessible to all offers us the best chance at that future.