Last week the governor of the Bank of Canada, Stephen Poloz, caught many off guard when he suggested that one way Canadians could cope with rising interest rates could be to fall in love with smaller homes. Some might think that this so so un-Canadian given we live in a land mass that is almost three times larger than India and a population that is equivalent of Mumbai and Delhi combined. Forget about living life King size, here you have the growing tribe of socially and ecologically conscious folk eschewing the idea of oversized anything and BoC governor Stephen Poloz essentially endorsing a similar sentiment.
Here’s what he said at the press conference where he announced the rate hike: “People who don’t qualify for a mortgage on the house they wish today have multiple avenues of adjustment, one of them being to just go ahead to buy a smaller or less expensive home.”
Unconventional advice coming from a Govenor of the Bank of Canada preaching the virtues of frugality. Over the years I’ve heard and listened to bank managers encourage and even goad customers into buying a bigger home or an investment property by utilizing the equity in the home or relying on their line of credit. We live in a debt-laden society where everyone is in a way living way beyond their means and depend largely on the sale of their real estate investments to live comfortably in their old age. Essentially our homes doubles up as our investment, so in the minds of many, the smaller the home, the smaller the investment.
According to a PricewaterhouseCoopers (PwC) report from 2017, Canadians own, on average, the third-largest homes in the world, behind only Australians and Americans. At nearly 2,000 square feet, our homes are more than twice as large as homes of our British counterparts.
Honestly our love for big homes is what has caused the kind of urban problems we are facing today namely infrastructure and traffic gridlock. It is also in a large part responsible for the housing affordability crisis affecting the millennials and new Canadians struggling to get their foot in the door both in the workplace and into their first home.
It is also making thousands of home-owners ‘house poor’. As the price of homes rise and incomes remain mostly stagnant, more families are forced to put aside ever large portions of their income toward their mortgage and other house related expenses. This means foregoing those family vacations, ballet classes, summer camps and other such activities that could richly benefit their children and future.
As interest rates rise, I suspect more families will sacrifice elements of their lifestyle or scale back expenses in other areas, notably entertainment and experiences.
The Chinese and South Asian immigrants to Canada are today among the biggest investors in real estate. Buying a ‘big’ home is a status symbol like nothing else. I have met paper millionaires, the kind who have a couple of millions in real estate assets who live and dress like homeless people because they simply can’t afford that well-cut jacket and settle for something way less flattering.
Many of these people earn six-figure salaries but spend their days and nights worrying what will happen to their retirement nest egg if the real estate market ever goes south, if that happened their plans to move south would go out their bay window. I met one such person who has been agonizing over the ideal time to sell off his real estate investment property, and has watched for months with dismay as the real estate market has slowed. He wants to sell his detached house and move into something smaller in the same city now that he is an empty nester. In reality this couple has little reason to be living in an almost 4,000 sq. foot house or rather I call it a prison because they mostly spend all their vacation and free time in that house. This person has also researched smaller townhouses and apartments and has concluded that smaller homes seem to cost a lot more that he imagined and realized that his bigger home would not only be slightly harder to sell but he’d get less that he would like given the substantial home improvements he’s made over the years.
New immigrants, many of whom have lived in modest and tiny apartments in their countries of origin I suspect won’t take Govenor Poloz’s suggestion about considering smaller homes seriously because buying a big home is partly the reason they chose Canada to be their home. How else does an immigrant proclaim to the world that he or she has arrived if they don’t own an impressive home that is 3 to 4,000 sq. feet in size? When South Asians go house hunting, size definitely matters. The only ones thinking about their carbon footprint are millennials and a large number of them will never be guilty of owning a home leave alone a big home. The millennials who favor lifestyle and living in Liliputian dwellings have mostly come from wealthy and upper-middle class families and have experienced and are tired of living in suburban McMansions. For them boasting a smaller carbon footprint is something they flaunt and thereby make a statement. New South Asian immigrants on the other hand aspire to buy bigger and better in order to often compensate for what they didn’t have growing up. -CINEWS