Even as the Normans yomped ashore in 1066, the English – unlike most of the continent – already had highly developed property rights, which became embedded over the following centuries. By the 1600s, as the newly minted United Kingdoms of England and Scotland went on their global expansion spree, it exported its obsession with property ownership. Two nations in particular have remained property junkies: Canada and Australia. In each, the property market outlook is, at best, ugly.
The similarities between both countries are obvious. Each is the size of a continent, yet under-populated. Residential (and commercial) property prices have been rising steadily since late last century, with the 2008 financial crisis resulting in only a brief downturn as their governments and central banks reacted quickly, making money cheap and available. Lastly, each has banking systems largely closed to outside competition. This gives their banks cartel-like pricing and fatter profit margins, which helps shield the economies from the volatility inherent in being giant commodity producers.
Canada heads for crisis…
Canada’s residential market has an unusual model. It originally developed a system whereby most house buyers are forced to take out government-backed default insurance, thus passing the risk from the lenders to the taxpayer. This was similar to America until 2008, where investors assumed the key government-sponsored mortgage agencies known as Fannie Mae and Freddie Mac could always support the market. Both went bust. Even today, half of all Canada’s home loans are insured. The result has been poor credit checking by lenders as there is no risk to their balance sheets. However, regulatory changes have unwound this cosy system, putting the risk back onto house buyers and the mortgage providers. The availability and price – the interest cost – of credit are the key drivers of all property markets, and in Canada both are worsening.
Housing supply has grown over the last two decades in response to seemingly ever-rising prices, with huge gains from Toronto to Vancouver. The house- price-to-median income ratios in the two cities are an eye-watering 12 and nine respectively.