For Canadian cities with red-hot real estate markets, London – and indeed much of urbanized southern England – offer a bracing glimpse of a future where the ripple effects of housing speculation are etched on all aspects of city living and domestic budgets.
David King is the London organizer of an advocacy group called Priced Out, which lobbies for not just more affordable housing but a sea-change in attitudes that are woven deeply into the fabric of a society where the cost of shelter has become an all-consuming problem.
As King told me last week, many people in London must juggle stagnant wages and steadily rising transit, daycare, energy and food costs. Consequently, there’s a “desperate” search for other sources of wealth, and the obvious solution is the private housing market. “In London,” he says, “your house will earn more income than you do.” Many residents are heavily invested in house prices and speculation because it’s their only way to create a reasonable retirement nest egg.
In other words, in an era of declining public services, they regard residential real estate as if it were a self-directed pension plan or RSP.
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The calculation, in some ways, isn’t difficult to fathom. After accounting for fees and cyclical losses, stock market returns for average investors have lagged the escalation in real estate prices. Yet according to this graphic analysis published by The Guardian, the vast majority of residential real estate in southern England is beyond reach for those earning minimum or average incomes.
It’s a Catch-22 that also confronts long-time homeowners in rapidly gentrifying Toronto and Vancouver neighbourhoods: there may be a lot of paper value locked in their homes, but much of it will be soaked up if they hope to relocate within the city. All that speculative equity in the house, which the Canadian Bankers Association claims will help homeowners increase their net worth, only turns into genuine savings if downsizers are prepared to leave town or rent.
In London, lower-and middle-income earners who carry ruinous mortgages or are unable to extract themselves from the rental market now have their own label: “Endies” – “Employed, but No Disposable Income or Savings.” “In contrast to the Yuppies who were proudly ostentatious,” according to “Hollow Promise,” a 2014 report from Centre for London, “the Endies live quiet and modest lives largely hidden from view for a simple reason: most of the time they cannot afford to go out. Life is an endless treadmill of work, commuting and recovering at home, often with the Internet for company and little other respite.”
Greater Toronto, of course, already has its own version of the phenomenon – the so-called third city, or first-ring suburbs that have seen a long-term decline in family incomes. But the powerful post-2008 combination of spiralling house prices and historically low interest rates has also created a generation of heavily indebted homeowners who may find themselves deeply challenged to save.
Homes in booming Canadian cities such as Toronto and Vancouver aren’t as unaffordable as London’s – yet. But they may get there soon. The average London home now sells for more than 12 times median income. But the $602,000 average sale price for a GTA home in August is now more than eight times median GTA income (the ratio is slightly lower for condos, at about 5.5 times).
Unsurprisingly, Canadian household debt in 2015 hit record levels, at 163 per cent of disposable income – with mortgages accounting for the bulk of that amount. (In 1990, total household debt was just 85 per cent of disposable income.) The comparisons to London are jarring. As Reuters reported in September, U.K. household debt, though very high by international standards, is still proportionally less than Canada’s, at just 140 per cent of income. Those Londoners who are actually able to own homes owe, on average, a whopping $260,000 Canadian on their mortgages, according to analysis done by The Guardian. But according to Manulife, Ontario mortgage holders aren’t that far behind: the average here is $193,000 – and that figure is presumably higher in Toronto itself.
In our desperate pursuit of real estate, is this degree of housing-related indebtedness in London where urban Canada is headed?
Seems so. Many Canadian home owners are “living day to day,” Manulife Bank of Canada CEO Rick Lunny told the Wall Street Journal last June in response to a survey showing that fully a third of mortgage holders would “struggle to make payments within three months” if the principal breadwinner in the home lost their job or became incapacitated.
Longer term, questions linger about Canadian homeowners’ ability to save for retirement when they’re lugging around the sort of crushing mortgage required to buy a home in a desirable area in cities like Toronto or Vancouver. Personal savings rates across the country plunged to an average of 3.6 per cent by the end of 2014, the third straight year of decline. By contrast, household savings levels in 1982 were almost 20 per cent.
Some analysts warn that Canada is looking at a generation of poor seniors while others say people are still saving enough for retirement. The reality is that the number of working-age Canadians with defined benefit pension plans has plunged in recent years, but less than a quarter of all tax filers contribute to an RSP.
While the low level of savings can be attributed to all sorts of factors, homeowners who have taken on a heavy mortgage that eats up a large chunk of their after-tax household savings will almost certainly contribute less than they could to their retirements. After all, for those who’ve plunged into the frenzied housing markets in booming cities from Vancouver to Toronto to London, that home is the retirement plan because its resale value can only grow due to the seemingly insatiable demand for desirable dwellings in lively urban neighbourhoods.
Or at least, that’s the story many big city urbanites from Vancouver to London tell themselves as they struggle with mortgages they may never pay down.
Urban affairs journalist John Lorinc is a senior editor at Spacing Magazine.