Inflated house prices are widening inequality, and inheritances will only further the gap

My parents bought a house in the early 1960s for less than $25,000. They sold it a quarter-century later for more than 30 times that amount. Compounded interest in any long-term investment would have been hard pressed to deliver that enormous increase. We bought a house in the 1980s for $250,000. It was recently sold by new owners for over $2 million, an eightfold increase. Two deep recessions later made its return much less impressive.

Now another real estate rocket has taken off. Today’s stats, soaring higher daily, are unhelpful in assessing future damage — as is discounting for inflation retroactively, as it has pushed mortgages from 18 per cent to less than four per cent. Two anecdotes may provide a hint about the risks. A country neighbour has watched a property they bid on double in value in just two years. There are estimated to be more than 27,000 empty homes in Canada today, snapped up by foreign investors, many of them regularly flipped to future non-residents.

While much has been written about how the housing inequality gap is growing, less attention is paid to how this fever contributes to a widening wealth gap among all Canadians. In addition to foreign, often “hot,” money pumping the froth, two other factors will maintain steeply rising prices. House sellers in Vancouver and Toronto are taking their pile of $2-4 million in cash — not uncommon in either city for a single family home — and buying homes with even more inflated values.

But we are on the edge of a much larger compounding threat to social stability: inheritance. Thomas Piketty, the radical French political historian, was among the first to remind us that until the 19th century, the only certain way to get rich was not innovation, trade or even larceny. It was to marry money or to inherit it yourself. That rigid social immobility won’t return, but millions of citizens inheriting large sums will deepen and widen the wealth gap.

My generation will pass many trillions of dollars to our children. Estimates vary widely, between $50 and $80 trillion dollars, in Canada and the U.S. Generation X and millennials make up somewhere from eight to 10 million Canadians, depending on how you count. The arithmetic thus becomes astonishing. Taking the midpoint of both ranges means that many of them will be handed more than half a million dollars over the next two decades.

Many of the millennials among them — by far Canada’s poorest generation — will become overnight millionaires. Those without property-owning parents will remain among the poorest. Many factors can nudge these sums up or down: recessions, pandemics, inflation. But if today’s real estate boom continues for only a few more years, all these estimates will be far below reality and the real inequality impact. We know who the likely beneficiaries and the losers are, however. If you are a white university grad and living in a big city, you are much more likely to be a winner. If you’re not…

In addition, we are soon to emerge from the greatest wealth destruction event for low-income Canadians: the pandemic. As Bank of Canada governor Tiff Macklem said this week, “We are in the sharpest and most unequal economic cycle of our lifetime.” A raft of connected policy initiatives are needed: serious financial disincentives to non-resident home buyers and on those holding vacant homes; measures to cool housing prices including mortgage restraint, higher transaction fees and greatly increased affordable housing; inheritance taxes and taxes on capital gains that are less inequitable to wage earners.

The usual voices will rise in horror — realtors, developers, mortgage brokers and bankers. All huge beneficiaries of the current mania. We hear much less from the Canadians who live in barely affordable rentals, already stretched to spend far too much on their housing. They will be pushed further down the family asset ladder by the tsunami of cash passing to friends and colleagues. The only difference between them: parents made rich by a frenzied property market. This unfairness will discourage new immigrants and undermine poorer Canadians’ dreams of better lives for their children. Unchecked, it will breed serious social conflict.