Nichols College

Housing Bubble
The Canadian and Chinese Housing Bubble

Benjamin Davidson & Jason Radzik

Econ-307 (Money, Banking & the Economy)

Professor Khanal

December 6, 2017

pg. 1
 Tables of Content

Cover Page ……………………………………………………………………….... 1

Tables of Content ………………………………………………………………….. 2

Introduction …………………………………………………………………......…. 3

U.S. Housing Bubble of 2008 ……………………………………………………... 4

China ………………………………………………………………………………. 6

Macau, China …………………………………………………………………...…. 9

Macau as a Gambling City ………………………………………………… 9
Macau Real Estate ………………………………………………………... 11

Macau versus United States ……………………………………………………… 12

Canadian Housing Bubble ……………………………………………………….. 13

Canadian Housing and Mortgage Corporation …………………………………... 15

Foreign Investment ………………………………………………………………. 17

Regulations ………………………………………………………………. 17
Cities at Risk ……………………………………………………………... 18

Cost of Living ……………………………………………………………………. 19

Canada versus United States …………………………………………………….. 19

Conclusion ……………………………………………………………………….. 20

Sources …………………………………………………………………………… 22

pg. 2
Introduction Commented [KK1]: Hi Ben and Jason,

I read your paper and thought you guys have put some
Having a roof over your head is one of the necessity in life to be able to thrive. Having a effort into the paper and it is a decent paper for Money
and Banking Class. Your grade for M&B class is an A
(95%).
home give a sense of security and reduce the stress of life in people. Furthermore, owning its a
However, I recommend you to spend some more time in
this paper before you present it in eastern Economic
property grows one’s assets and give provides them a sense of financial security, so long as the Association Meeting next March. As you make more
improvements in this paper, please don't hesitate to
payment are made and if said property keep, or increase, its value. Buying a house can be reach out to me with questions. I'll also forward you
some relevant articles and readings when I get a chance.
It was a pleasure having you both in my Money and
compared to buying securities. One would hope it increases in value which would build equity Banking class this semester.

for the future. Over the last twenty years or so, the housing markets throughout the world have
Commented [KK2]: Gives a sense of security and reduces
stress in the lives of people.
been through a roller coaster. For a long time, it was said that owning a property could finance

retirement or be passed down from generation to generation. However, in recent years,

mortgages given to individuals were used by investors to grow their wealth through the

financialization of the economy. Through the securitization of mortgages, which started in the

United States but is now spread in other countries, investors and banks saw this as an opportunity

to create wealth rapidly. This type of behavior from investors is what creates a bubble. Joseph

Stiglitz, in 1990, define the creation of a bubble as such:

Formatted: Indent: First line: 0.5"

“If the reason that the price is high today is only because investors believe that the selling price

will be high tomorrow – when ‘fundamentals’ factors do not seem to justify such a price – then a

bubble exist.”

For this section use the abstract you submitted to the conference For this paper, two countries,

Canada and China will be surveyed in order to determine if a bubble exists, or if it is growing or

imminent. To decide the current state of the housing bubble, if there is any, in Canada and China,

pg. 3
we will examine what madethe causes of the United States bubble of 2008, the cause of the

current bubble through legislative change, data, and trends in the economy. At the conclusion of

this research paper, we will be able to show if the bubble is a myth or real and to recommend

policy change to avoid a burst. Formatted: Font:

U.S. Housing Bubble 2008 May be it is a good idea to provide a historical background of

US financial crisis in the first section. You can bring in Hyman Minsky’s Stage Approach

to Capitalism and Financial Instability Hypothesis in order to explain US financial crisis as

a systemic event.

In his book, The Return of Economic Depression and the 2008 Financial Crisis, Paul

Krugman defined bubbles as Ponzi scheme, meaning that if you are part of it you will make

substantial amount of money for the time being but if you do not put money in, you are left

behind. People engage in such activities, with their savings, because of high optimism in terms of

profits. Some saw this as the American Dream. Invest money and become rich quickly.

Unfortunately, when you want to do something quickly, the chances of failure increases. When

the bubble is “created,” there is still a fear within people that there is a risk of a crash. But that

fear vanishes, only to be replace by a new fear. The fear of being left out of the party (Krugman,

p. 146-147).

After the burst of the dot com bubble, a new bubble formed itself rapidly, the housing

bubble. For a long time, for low income people, buying a house was usually their main assets.

But, now, more than ever, people were able to buy houses that were out of their means. The now

infamous teaser rate of the early 2000s created a false need to borrow more for a house.

Historically, the American people had the habits of buying on credit. Traditionally, one would

buy a house by making a big enough down payment to, not only reduce monthly payments, be

pg. 4
able to sustain a drop in the value of the houses yet still have a positive equity. This principle

was abandoned during the years leading up to the crisis. There was a similar pattern as with a

stock bubble. People feared being left out of the market and miss the opportunity of a big

paycheck. The belief was, even if the payments could not be made, the value of the house would

raise and by selling it the borrower would be able to pay back its loan while still making a profit.

A similar situation happened in the 1980s with Lehman Brothers auction-rate’s where

individuals would lend money to the borrowing institution on a long-term basis, which would

legally tie up the money for thirty years. But, on a regular basis Lehman would hold auction in

which potential investor would bid to replace current investors who wished to get out and take

out their money (Krugman, p.159). In similar fashion as the housing market, soon enough the

auction market would run out of investors which caused the system, which, at its peak, would

contain $400 billion in auction-rate securities, to collapse in early 2008.

The collapse led to people blaming something, anything, for the collapse. On the right,

they were blaming the Community Reinforcement Act. A 1977 act passed to “force” bank to

lend money to minority who wished to purchase a home. The hypothesis that such act could have

cause a bubble thirty year after it had passed seems ludicrous. Furthermore, this act did not apply

to mortgage lenders but rather depository bank. Depository bank only made a handful of bad

loans therefore were not responsible for the collapse, at least not for the most part. To stick with

conservatives, they also “enjoyed” blaming Fannie Mae and Freddie Mac. The two governmental

companies responsible, or at least behind, for the securitization of the housing market. There is

some justification in blaming Fannie and Freddie for their role in the bubble. After all, after the

collapse of several savings and loan, it had to fill a hole in the economy, from which they gave

out many imprudent loans which allowed them to grow considerably between 1990 and 2003.

pg. 5
From that information, it would be easy to give reason to the people who blame those two

institutions. However, during that same time period, the two agencies faced several accounting

scandals which caused them to reduce their activities during the agitated period in between 2004

and 2006. The agencies had a “good” alibi to show that they did not play a major role in the

catastrophe (Krugman, p.162-163)in the whole section you have relied on a single source, a good

research paper tries to bring in insights from multiple sources.

It is important to note the importance that mortgages had in causing this crisis. They are

arguably the largest cause of said crisis. As mentioned above, the securitization of the housing

market was the beginning of the crash. When there was extreme monetary incentive to hand out

mortgages to just about anyone, a bubble was formed. There was complete irresponsible action

taken by these banks and mortgage lenders who did not think of the implications that were to

come. The rise in sub-prime mortgages should have been an indicator to the crash as the sub-

primes are not sustainable. They are given to people with bad credit and who might not even be

able to afford the interest payments on such a mortgage. The banks only saw them as high

interest rates. And when lumped into a CDO, the risk was almost entirely mitigated in their eyes.

These risky behaviors should be kept in the spotlight as perhaps the largest cause of the market

crash of 2008. Commented [KK3]: When you move from one section to
another it is important to have a smooth transition.
And in your revised version may be it is a good idea to move
to Canada after the US and then talk about China.
China

China is a country that has taken the world by storm over the past 50 years. The country

is the number one gross exporter in the entire world. Manufacturing in the country has grown

astronomically as wages are so low it keep production costs very cheap. As of 2016, the

manufacturing industry accounted for 40% of the country’s total GDP. China’s total GDP for the

pg. 6
year ending 2016 came out to $11199.15 billion U.S. dollars (Trading Economics). This has been

the largest GDP value the country has ever seen and it keeps growing. Since 2008, GDP is up

over 143%.

A line of regression shows that GDP has been growing at a rather constant rate over the past 10

years, with growth slowing in 2016. There is speculation that leads us to believe that these

numbers have been artificially supplemented by the government and may not paint an accurate

picture.

China’s GDP grows at extremely high rates. Comparatively, since 2008, U.S. GDP has

grown only 26%. So what sparks such huge growth in the Chinese economy? One can argue that

the infamous Chinese ghost towns are a way to inflate GDP without adding any real value. China

has spent hundreds of billions of dollars to modernize and commercialize cities for 21st century

use. Probably the most famous Chinese ghost city or region is Ordos Kangbashi. The city was

built in 2004 and can house comfortably 2,000,000 residents (Forbes 2016). This is an

astonishing amount of people considering Boston only holds roughly 675,000 people.

pg. 7
 China has realized that the extremely rapid growth of the housing market is nearing

treacherous level and have started to implement policy to reign in the growth. One instance is the

closing of a tax loopholes for first-time home buyers in Hong Kong. Wealthy investors were

basically paying first-time home buyers to purchase property for them in order to receive a tax

break. In China, there is a 15% tax for home purchased by regular individuals and only a 4.25%

tax if they are first-time home buyers. In the city of Hangzhou, they banned single adults who

own a home from buying apartments. This is an extreme crack-down to try and stifle the rapid

inflation in the region. Another policy implemented by the same city was increasing the

minimum down payment for 20% of the house’s value to 60%. This extremely limits buyers

because not many people have hundreds of thousands of dollars to put down on a house and

remain financially comfortable (Forbes 2017).

Since 2007, salaries in China have grown 171%. This growth is impressive over such a

short period of time. It shows that workers are being paid at a rate similar to that of the growth of

the economy. All of this growth is going to great a problem for China. According to the IMF, if

growth rates continue at the speed they’re going, China will have a labor shortage between the

years 2020 and 2025. This is an insane thought since China is thought to be the haven of low-

cost and extremely abundant labor for manufacturing.

The IMF published a paper in January of 2013 titled Chronicle of a Decline Foretold:

Has China Reached the Lewis Turning Point? In this paper, IMF talks about how China could be Commented [KK4]: What does this mean? May be it is a
good idea to explain with a graph.
in the midst of a Lewis Turning point. They define this as

“… an economy with excess labor in a low productivity sector (agriculture in China’s

case), wage increases in the industrial sector are limited by wages in agriculture, as labor

moves from the farms to industry (Lewis, 1954). Productivity gains in the industrial

pg. 8
 sector, achieved through more investment, raise employment in the industrial sector and

the overall economy. Productivity running ahead of wages in the industrial sector makes

the industrial sector more profitable than if the economy was at full employment and

promotes higher investment. As agriculture surplus labor is exhausted, industrial wages

rise faster, industrial profits are squeezed, and investment falls. At that point, the

economy is said to have crossed the Lewis Turning Point.”

This paints an accurate picture of what is actually going on in China today. The extreme wage

growth supports this model to the fullest extent. 40% of the Chinese GDP is made up of the

industrial sector and that number is growing. One the agriculture market is out of laborers, the

cheap labor will be over and the staple of the Chinese economy will decease. If this theory is true

then China will be amidst an extreme economic depression. The Chinese housing market would

be impacted just as hard because when people do not have jobs, they are unable to make their

mortgage payment and the system collapses. Commented [KK5]: It is important to transition smoothly
from one section to other.

Macau, China

Macau as a Gambling City

Macau has been a gaming and gambling haven for almost 100 years. The city had its first

string of casinos established in 1930 by Fok Chi Ting. Throughout the years, different forms of

gambling were added outside of the traditional casino setting, things like greyhound and horse

racing. In 1961, the governor of the time Jaime Silverio Marques designated the city as a

“permanent gaming region” that was a low taxation region that regarded gambling and tourism

and their major economic drivers.

pg. 9
 The Macau gambling scene gained lots of headwind during the early 21st century.

Throughout 2000, 2001, and 2002 major laws were passed which laid the framework for which

casinos could be established. In 2004, the first major casinos were settled and operating. More

importantly, American companies were beginning to establish a presence in the Macau gambling

scene. Companies like MGM and Venetian have created a large presence in the area with 6

casinos operating in total between both of them.

Gambling and tourism account for over 50% of Macau’s GDP. Chinese tourists, and

wealthy tourists at that, are the majority visitor of the gambling city. In October of 2013, the city

saw revenues of $4.57 billion dollars from the casinos alone. The rise in tourism rates have been

a huge driver for the city. From 1999 to 2008, tourism rose over 1500%, climbing from 800,000

tourists to over 12 million tourists, respectively (Business Insider). So, what exactly caused this

huge rise in gambling?

Jorge A.F. Godhino, a law professor at the University of Macau, cited money laundering

as a major driver of the casino and gambling industries. Macau law limits people to moving only

up to $3,200 from the mainland at a time or $50,000 annually. As a way around that, there are

these things called junket agents who are basically agents that run money to and from the

mainland. Wealthy people use these agents to get large amounts of money into the casinos. In his

paper titled The Prevention of Money Laundering in Macau Casinos, he explicitly talks about

how these junket agents are facilitating the process of taking illegal money, e.g. proceeds from

drug trafficking, bribery, and embezzlement, into the casino and making it come out as legal

funds.

“There is no doubt that this channel can also serve for the movement of funds of an illicit

origin, whether coming from corruption, embezzlement of public or private entities, or

pg. 10
 any other sources. Hence the particular need for rules and procedures for the detection of

illegal transfers. (pg. 266)”

Macau Real Estate

Real estate is one of the most common investment assets in the 21st century. People buy

property as investment property in certain areas where they think the values will appreciate.

Macau is a prime example of real estate value exponentially appreciating. In 2008, Macau was

also affected by the housing market collapse that occurred the United States. During that year,

property value fell by almost 32%. But since 2008, property values have risen 426% (which

comes out to 281% in real terms) in just 8 years (Global Property Guide). These rates of returns

are almost unheard of in such a fixed, long-term asset.

So, what caused this aggressive appreciation is housing values? According to global

property guide, the Macau housing market tends to follow its economy. Now with gambling as

one of leading economic drivers, the housing market is following right along. As mentioned

above, gambling and tourism revenues account for over 50% of the area’s GDP. When seeing

these revenues grow at a rapid rate, it seems logical to assume housing prices would follow the

same trend.

pg. 11
 From this graph, you can see just how closely the housing market is intertwined with the

economy. Recent years have seen a severe decline in housing price growth, not to be associated

with a decline in housing prices themselves.

Macau versus United States

As stated above, the American housing bubble was catastrophic all over the world. So

many countries across the world were closely intertwined with the U.S. market. Financial

markets around the world were affected, including the Chinese market. In the times before the

U.S. collapse, the housing markets were at record levels. From 2000 to 2005, according to the

FHFA index, house prices were rising around 6.5% annually. Mortgages also rose at exponential

rates pre-crash. The rapid expansion of mortgages, and mortgages to people who could not afford

them at that, was the largest cause of the market collapse and bubble bursting. So, is Macau in a

similar place right now?

pg. 12
 Wages in Macau have not been keeping up with the change in housing prices.

Inserting a trend line shows how inconsistent the growth of wages in Macau has been. From the

period of 2010 to 2012, wages were growing at very low rates as compared to the trend line.

During this period in the housing market, prices were growing in the double digits, over 30% in

2012 from the graph mentioned before as comparison to GDP. So, this inconsistency could be a

problem when it comes to mortgages.

During the time period of 2012 where housing prices were growing extremely fast, so

were the rates of mortgages given out by the banks. Residential mortgage loans rose 22% over

the first quarter with a total of 5.7 billion being lent out (Macau Times). At the same time,

delinquency rates were still very low, at .08%, despite having rather stagnant wages and rapidly

appreciating housing prices.

Moving to 2016, wages growth has stagnated completely. It seems that there were much

more limited resources when trying to find out why this stagnation occurred. In the graph above,

pg. 13
there is a flat period between 2015 and 2017 indicating that maybe there was a ceiling that was

put into place or some other sort of policy to restrict growth. During this time also housing price

growth began to stagnate, moving down from the high rates in the past and hovering in the single

digits and even dipping into the negatives. Commented [KK6]: I noticed that Jason has relied on news
sources rather than scholarly sources in the China and Macau
sections, is there a reason? Please opt for more scholarly
sources.
Canadian Housing Bubble

The Canadian economy has always shown tendency of moving in synchronization with

the American economy. In the years leading up to the bubble, from the early 21st century to

2007, the Canadian economy grew tremendously but so did its mortgage industry. In fact, from

2001 to 2005 only, home ownership in Canada increased by almost 2% while in 2017 it is

estimated to be 66.5% (graph 1).

Graph 1

Throughout the years, owning a house became the single most important asset for

Canadians during that period of time. It accounted for one third of the population’s total assets,

which was valued at $5.6 trillion (Le Goff, year?). The increase in home ownership was also

represented in the wealth of the population. Today, without a shadow of a doubt, the population

pg. 14
is richer than it was then. It is, in large part, due to the increase in market value of the residential

real estate (Le Goff, year?). But this is not all rainbows and sunshine. There is a downturn of

increasing a population’s wealth through home ownership. We saw a similar trend in the United

States during that same period of time even though their home ownership rate went down since

1999. In 2017, home ownership in the United States, according to the Census bureau was 63.9%

compared to approximately 67% in 1999. But, where we can really observe a similar trend is in

home market value. In America, home value went from an average of 194,033.33 in 1999 to

375,090 so far in 2017 (U.S. Census, year?).1 While we can agree that purchasing a house is an

investment where one would hope the value will increase, not everyone who buys one has the

means necessary to buy one without taking out mortgage. In other words, they are leveraging

their investment. Solely in Canada, households’ debt to disposable income (graph 2), so far in

2017, reached 169.9%, an increase of more than 3% compare to the first quarter of 2016 and a

more than 30% increase since the first quarter of 2007 (Trading Economics). But, it goes to say

that growth in the real estate sector of the economy has been beneficial for those who were

involved and the economy in general.

Graph 2

1
At the time of writing, only data from January to October were available.
pg. 15
Canada Mortgage and Housing Corporation (CMHC)

The Canada Mortgage and Housing Corporation, also known as CMHC2, is a federal

agency for housing in Canada and is Canada’s premier provider of mortgage loan insurance,

mortgage backed securities, housing policy and programs, and housing research (Le Goff). By

law, it has the mandate to promote:

 Housing construction, repair and modernization;

 Housing affordability and choice;

 Improvements to overall living conditions;

 Availability of low-cost financing;

 Well-being of housing sector in national economy.

It, also, has the following corporate objectives:

 Improve housing choice and affordability for Canadians;

 Improve housing and living conditions for Canadians;

2
In this paper, CHMC might be refer to as “the Corporation.”
pg. 16
  Support market competitiveness, job creation, and housing sector well-being;

 Be a progressive and responsive organization.

To support its activities, the Corporation finance itself with the following four accounts:

 Minister’s Account: Funds assisted housing programs and CMHC’s research and export

activities;

 Corporate Account: Encompasses loans and other investments, the results of residual

lending activities and housing-related services;

 Mortgage Insurance Fund: Provides insurance for approved lenders against borrower

default on residential mortgage loans;

 Mortgage-Backed Securities Guarantee Fund: Assured timely payment of principle and

interest for investors in securities based on insured mortgages.

Through the Canada’s Bank Act, the Corporation is obligated to issue insurance for high-ratio

mortgages. High-ratio mortgages are mortgages where a down payment of under 25% has been

made. The insurance is in place to protect lenders against default. This insurance is offered either

through the CHMC or any approved insurer and the premium of the insurance varies from 0.65%

to 2.75% depending on the value of the loan. To do so, the Corporation utilized its Mortgage

Loan Insurance program. By insuring borrower default, the insurance also decreases the risk of

lenders and increase their desire to lend money to buyers whom in normal time might represent a

greater default risk which makes buying a home quicker and easier for everyone (Le Goff).

Foreign Investment

Regulations

pg. 17
 With the economy transforming itself more into a service economy and becoming less of

an industrial economy, there is a higher need of workers in urban areas. In Canada, the main

urban areas are Toronto and Vancouver, which constitutes the two-main business hub in Canada.

It is popular for foreign investors to invest substantial sums of money in housing. The result of

such investment is an increase in the cost of buying a house. For instance, in Vancouver, prior to

implementing a 15% tax on foreign investment in August 2016, the cost of a detached home

went from about C$76,000 (US$56,000) in 2014 to over C$1 million (US$ 740,000) in 2016

while in Toronto the cost of a detached home went up by 33% to reach an average of C$1.21

million per house (Kassam 2017 & Mayoh 2017). It, clearly, was not a sustainable model which

forced cities to take action. Prior to 2016, the year the tax was implemented, in Vancouver, there

was a 13% foreign investor rate. Since then, there was approximately a 4% foreign investor rate

(Mayoh 2017). It is harder to estimate the number of foreign investors in Toronto since officials

do not keep statistics of it. The purpose of implementing such tax is clear: to reduce the price of a

house and to increase the quality of life of the people, especially the middle-class (Kassam 2017

& Mayoh 2017). It is important to note that such taxes will only be impose on investors and not

on family who are buying a property to raise a family or to establish themselves permanently. To

differentiate between the two, if the house is bought by a foreigner then it will be taxed (Kassam

2017 & Kassam 2016).

Foreign investors, mostly from China, saw the Vancouver area as an attractive investment

opportunity because, at the time, the interest rates were low which made the houses cheap

(Kassam 2017). It was, in addition, a campaign promise of the current mayor Gregor Robertson

to find a way to make it affordable for lower and middle-income people to afford a home in the

city. The tax became a necessity before the crisis became unstoppable in a market were the

pg. 18
housing market was one of the least affordable, not just in Canada, but in the world (Kassam

2016). Since the inception of the tax, the price has started to fall down which has everyone

worried and which forced Mayor Robertson to declare that the city is monitoring the situation

because they do not wish to have “instability or volatility.” But in reality, 41% foreign buyers,

especially those from China, are looking to buy a house in Canada to attend school according to

a survey made by Juwai.com in partnership with Sotheby’s International Realty Canada. Only

27% of people wanted to invest either in Vancouver or Toronto (Nguyen 2017).

Cities at Risk

The situation in Canada is worrying economists throughout the world. In 2017, UBS

released a study in which they evaluated the housing market in global financial centers. The city

who was the most at risk of experimenting a bubble was Toronto with an index of 2.12, beating

Stockholm by .11 and Vancouver by .32, who was the fourth most at risk. UBS estimated that

over the last five years, rose by 50% which is a common rate among cities who represents a risk

of a bubble. UBS also indicated that the past global financial crisis did not drag down the

housing market of Toronto nor Vancouver as a weaker Canadian dollar cushioned the blow.

They also declared: “Overly loose monetary policy, for too long, in addition to buoyant foreign

demand, unmoored their housing markets from economic fundamentals – and both markets are

now in bubble risk territory.” But it was also mentioned in the report that as soon as the

Canadian dollar gained more strength and there are more interest rate hikes, the demand for

housing in Canada from foreign investor will drastically decrease (UBS 2017 & Blackstone

2017).

Cost of Living

pg. 19
 Over the years, the cost of living in urban areas has increased. In 2017, for example, for a

20 years old single woman who has a college education, she would need to be making a

minimum of C$35,000 a year in order to be able to afford monthly expenses of about C$2,500. It

is bad news for people working minimum wage3 job in the city where they make around C23,720

a year which is by no means enough to rent an apartment, never mind buying a property (Genore

2017). With the new regulations put in place by the government to control the price of sales of

properties in the city, it will just make it harder for sellers to find suitable buyers without

decreasing their prices.

Canada versus United States

It is hard to compare the United States to Canada as the reason the bubble may implode

in Canada is far different than why the American housing market collapsed. The United States’

market collapsed, as explained in the second section of this paper, due to bad loans and subprime

mortgages. In Canada, the situation is far different where the weak currency and low interest

rates is what makes the housing market attractive to wealthy people seeking new investment

opportunities but also people who want to immigrate to Canada. Going forward, it will be

important for the government of Canada to find a way to control the currency and to control the

interest rates hike to not scare investor away.

Conclusion

Housing bubbles have been an all too familiar trend in the past eight years. Starting with

arguably the worst, the United States crisis, the world has been on edge and been very careful

with real estate markets. China has started to implement policy to try and alleviate the bubbles

3
In Toronto, the minimum is currently C$11.40 an hour.
pg. 20
that have formed. Macau seems to be lagging behind and riding the waves of gambling, which is

extremely volatile. The Macau market, if no policy is implemented, we fear will see a severe

collapse when the bubble bursts. The extreme rise in housing prices are not sustainable as Macau

natives do not have the means to pay the mortgages since wages are not rising. The bubble will

only continue to grow as gambling revenues go up and more people are attracted to the area. The

false growth in GDP only stirs the pot further as it makes people believe there is substance

behind price growth when in fact there is nothing sustainable.

In Canada, housing prices in Toronto are growing at exponential rates. With over 1250%

increase in price in just 10 years, the current growth rate is not sustainable. Natives to the city

cannot afford to even rent an apartment at current wage levels. Government officials tried to

implement policy to slow the growth of foreign investment in order to bring prices back to a

controllable level. Even according to UBS, Toronto has a long road ahead before it is back of

stable ground in its housing market. If nothing changes, the bubble will burst and investors and

citizens alike will be in tough circumstances. But, in similar fashion to Macau, if the wage gap

does not get smaller, through legislation, there is risk that something bigger than a crisis happens

in Canada. It is a similar problem than what is happening currently in the United States with

stagnation. To put it in Minsky’s idea, “when the economy achieves what looks to be robust and

stable growth, it is setting up the conditions in which a crash becomes ever more likely.” Commented [KK7]: It is important to have a historical
background section based on Minsky’s work.
Both of these countries have housing bubbles that need to be addressed through some sort

of monetary or fiscal policy. In China, the policy that has been most effective so far is the higher

down payment. This means buyers have to show commitment towards buying a house. When

60% is required, it takes years for a family to save for a house. In Canada, a policy like the one in

China should be implemented. It would severely curb foreign investment and citizens would be

pg. 21
 prioritized since they are more likely to save to be in that city. If the down payment was so high,

investors would find other investments to spend their money on for higher returns.

Work Cited Commented [KK8]: I don’t think I’ve seen all these sources
listed in the reference section cited in the text. It is important
to tally in-text citations and the reference list.
Arestis, Philip, and Ana Rosa Gonzalez. “Modeling the Housing Market in OECD Countries.”
doi:http://www.levyinstitute.org/pubs/wp_764.pdf .

Badkar, Mamta. “How China's Filthy Rich Use Macau to Launder Their Money.” Business Insider, 11
Nov. 2013, www.dicj.gov.mo/web/en/history/index.html.http://www.businessinsider.com/how-
people-use-macau-to-launder-money-2013-11.

Baran, Paul A., and Paul Sweezy. Monopoly Capital: an Essay on the American Economic and Social
Order. 1977.

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