3 Lessons From Canadian Housing Crisis That Can Be Used To … – Yahoo Finance

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Home buyers who bemoan the high prices and low inventory plaguing the U.S. housing market might take comfort in the fact that they don’t live north of the border. Canada is going through its own housing crisis — and it might be even worse than the one in the United States.

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The average home value in Canada has more than doubled since 2011, Business Insider reported, and one of the main problems is a lack of home inventory.

Greg Kalil — founder and managing partner of Stormont Partners, a Toronto-based merchant bank that specializes in real estate — wrote in a recent column for The Globe and Mail that Canada’s housing market is “critically undersupplied.”

Kalil cited a 2022 study by the Canada Mortgage and Housing Corp. The study stated that the country will need to produce 3.5 million more housing units than are currently in the delivery pipeline by 2030 to “restore housing affordability.”

“Yet it is obvious that we will not be able to correct this situation by 2030, and probably not even by 2040,” Kalil wrote.

That kind of market challenge will ring familiar to Americans who have struggled with many of the same issues regarding inventory and prices. But Canada has an additional complication in that it is “almost certainly heading toward a recession,” according to Business Insider — and the nation’s housing market is partly to blame.

Here are three lessons from Canada’s housing crisis that the United States should take note of when dealing with its own housing crisis.

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Policies That Favor Homeownership

Municipal governments tend to control housing policy in Canada, according to Mosche Lander, a Concordia University economist. Those policies are “biased towards homeowners and not towards renters” because they are designed to limit homebuilding and keep home values elevated, he told Business Insider. Meanwhile, record population growth from immigration has increased demand, driving prices even higher.

One solution to this problem is to avoid implementing policies that encourage homeownership at the expense of the rental market, which has also suffered from low inventory in many cities. Developing more multifamily units in tight housing markets would alleviate some of the housing shortage and bring prices more in line with historical norms, experts suggest.

The Importance of Foreign Investment

As Kalil noted in his column, housing “does not magically appear” when there is demand for it. It takes time, infrastructure and money — lots of money. Because Canada’s housing economy does not have enough money to fund the nation’s housing growth needs, lawmakers need to consider tax changes to “encourage an increased level of investment by private, public and institutional investors” — including foreign investors.

“Canada has an increasing share of the world’s population and it needs more of the world’s capital to go with it,” Kalil wrote.

The Risks of Excessive Mortgage Debt

Both Canada and the U.S. have had to deal with higher mortgage rates this year. The difference in Canada is the standard home mortgage has to be refinanced after five years and “fully paid back after 25 years,” Business Insider noted. In contrast, the typical U.S. homeowner gets a 30-year fixed-rate mortgage that offers protection against rate increases.

One result of Canada’s mortgage policies is that it has the highest household debt as a share of gross domestic product in the G7, according to Business Insider. About three-quarters of Canada’s household debt is from mortgages. The lesson here is that saddling homeowners with too much debt contributes to the kinds of financial problems that can ultimately lead to a housing crisis that might eventually lead to a crash — something the U.S. experienced in the late 2000s.

More From GOBankingRates

This article originally appeared on GOBankingRates.com: 3 Lessons From Canadian Housing Crisis That Can Be Used To Bolster US Real Estate Struggles

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