When US Housing prices deflated, Canada's kept climbing
I don’t want to talk about whether Toronto’s housing market is a bubble or not. The media has a fascination over that question as can be seen here, here, here, and many more. Economists, who are far more qualified than I, debate that point to death. Even government entities are mixed about it.
But it is undeniable that Toronto’s housing prices have risen far more and far quicker than anyone expected. Consequences include low-income families being gentrified out of their homes by rising rents, middle-class families who find buying their first home farther away with each passing year, and even those who can afford to buy must enter bidding wars where success is dependent upon unconditional offers – asking for an inspection is a deal-breaker and even seeing the house in-person might be too much to ask.
But how’d did this come about? There is no shortage of theories, but I want to posit one that may be overlooked: Toronto has become the global capital of the mining industry – or more specifically the capital of mining finance - and that has led to the city’s rapid transformation.
The mining industry that has become exceptionally more international and more mobile in the past decade. In a free market environment, headquarters and the professional/knowledge workers employed in them are being pulled into ever-larger clusters with the goal of gaining competitive advantage. The Toronto Stock Exchange (TSX) now hosts 75 percent of all mining companies in the world. I posit that the finance industry is crossing sectors from mining to housing, as the workers in this industry walk out of their office doors and head to their ever-more expensive homes outside.
Bay Street in Downtown Toronto
How did Toronto become the global capital of mining?
Canada is big. Very big. Second largest country in the world by land area big. But most of that land is uninhabitable. Because of the weather and the soil can’t support agriculture so far north, ninety percent of the Canadian population lives within 100 miles of the US border. But between the sparse signs of civilization lies incredible mineral wealth. Over 220 active mines extract over 60 minerals, as it’s a key driver of employment and external investment in the country. Canada's economy is dependent on resource extraction.
The country (a) prioritizes infrastructure investment, (b) protects the rule of law, (c) maintains a fair and predictable regulatory landscape, (d) promotes free trade, and (e) is welcoming of foreign investment and foreign workers. A combination that, although common in the western world, is exceptionally rare when it comes to resource-dependent countries. Rather, most countries suffer from “the natural resource curse” which is the paradox that those with extraordinary mineral wealth experience slower growth and instability as they tend to be plagued with corruption, armed conflict, and a poor record of human rights and business protections.
Toronto serves as Canada’s business capital with Bay Street - Canada’s Wall Street – as the focal point of a knowledge ecosystem of researchers, government, and business administration. The city serves as the bridge between the broader world economy and the development of Canada’s natural resources. To take advantage of Toronto’s business environment, to partner with other firms, and to raise capital, it has become advantageous for mining companies to co-locate in Toronto. This agglomeration of mining has flooded Toronto with investment dollars. This wealth has spilled over into the housing market.
Because of bidding wars, all houses sell for over asking in Toronto. Asking prices are only what the bidding starts at.
How is the government responding?
As financiers bid up the price of housing, Toronto faces a worsening housing affordability crisis. CEO Evan Siddall of Canada Mortgage and Housing Corporation (CHMC) – the public entity responsibility for regulating the housing market with the dual goals of promoting homeownership while maintaining financial stability - expressed concern about the level of indebtedness Canadians are taking on to purchase homes. The Bank of Canada Governor Stephen Poloz has issued a warning about the “unsustainable” rise in Toronto real estate prices, but stopped short of referring to it as anything but reflecting fundamentals of job and population growth. The federal government has tightened house lending rules by (a) introducing tougher requirements to qualify for a mortgage and higher minimum down payments, (b) increasing reporting requirements to catch tax-dodgers, and (c) tightening rules on mortgage lenders including more stringent stress tests.
The Ontario (provincial) government recently passed a series of reforms into law intending to make housing more affordable for residents. This includes (a) expanding rent control policies to cap how fast rent can be increased on current tenants and further protections for them from being unduly evicted; (b) creating new policies that would expand housing supply by expediting condo approval near transit nodes, promoting greater infill development, and investing in government rental housing; and (c) following British’s Columbia’s lead, placing a 15 percent tax on foreign homebuyers to ensure that residential units are homes for locals foremost instead of a financial investment for those living abroad. Even though the policies have only been in place for a few weeks, anecdotal evidence suggests a cool-down of Toronto’s housing market
Canadian oil sands workers. Oil is Canada's biggest natural resource extraction industry.
But is mining really responsible for the rise in prices?
We don’t know, but it is worth further research. Financial capitals – London, New York, Singapore, Tokyo, etc. – throughout the world have seen dramatic prices increases. As Toronto joins the finance club, it would make sense for the pattern to follow. After all, Toronto still looks cheap in comparison. But there is yet to be hard evidence to prove this relationship.
Maybe Toronto is being hit by a different kind of resource curse: one where the finance of the industry makes the business capital too expensive to live in for regular folks. It's impact felt downtown instead of the hinterlands.
Do you find this argument convincing? Why or why not? Post below!