Canada’s alleged housing bubble has returned to the media spotlight with full force in recent months. Falling oil prices have slowed housing sales, which has led to speculation that a bust is drawing closer. Bank of Canada Governor Stephen Poloz did not help matters in December when he was widely quoted as claiming housing could be overvalued by as much as 30 per cent. Less quoted was his repeated assurance that Canadian real estate does not qualify as a bubble about to pop. The perennial fear of collapsing real estate values, at this point, has become a form of mass hysteria.
I have wondered lately whether higher education fits that mold. Theories of a “higher education bubble” exist, but mainstream economists almost universally scoff at them, which is understandable because calling student debt a “bubble” is highly misleading as anything more than a metaphor. Yet, it is also worth acknowledging that those who deny the possibility the loudest tend to belong to a knowledge-based class predisposed to uphold the value of university education. The question is not whether higher education has value, though. Rather, the question is whether underlying incentives have caused a misallocation of credit to leverage the wrong kinds of education in the wrong quantities.
The first symptom of a bubble to consider is rapidly rising prices. It is well known that tuition costs have grown significantly above the average inflation rate in both Canada and the United States. In the five academic years from 2010/11 to 2014/15, for example, the average tuition rate in Canada climbed from $5,146 to $5,959, which is roughly 3 per cent annually. During the same period, inflation averaged 1.5 per cent, indicating that tuition increased 1.5 per cent in real terms. Whether this trend is “good” or “bad,” it is not accelerating out of control. In comparison, however, real estate values appreciated by 80 per cent or more between 2001 and 2006 in seven American metropolitan areas. Now that is a bubble!
Student debt, too, is less of an issue and recent graduates are faring much better than is widely believed. The widely-reported number is that students graduate with around $25,000 in debt, but this figure is misleading. In 2012, for example, Simon Fraser University conducted a survey that revealed student debt levels to be roughly $24,600, yet, what is often missed is that this average excludes those who graduate debt free. The average drops to $14,500 when debt-free students are included as part of the analysis.
Bubbles are not just fast growing prices or debt loads, however, but prices that are not connected to market fundamentals. In Canada, rising tuition fees clearly reflect three fundamental forces: 1) demand rising faster than supply (the ratio of students to faculty has increased from 17 :1 to 25:1); 2) higher administrative costs; and 3) a shift in the balance of cost-sharing. Government funding, for example, once comprised more than 80 per cent of Canadian university operating revenues in 1990, but is today closer to 57 per cent percent on average.
Perhaps, then, Canada’s postsecondary education is less like the US housing bubble and more like our own “overvalued”–but not out of control–real estate. The analogy matches quite well. Rather than being driven by easy credit and speculation, our real estate boom is mostly confined to regional markets where the supply of housing is constrained and immigration is high. Low interest rates might have caused some overleveraging and modest mismatching, but it has not been enough for a big bust. In the same way, Canada’s model of postsecondary education leads to modest malinvestments in human capital: too many people with arts degrees, too few in vocational programs. These malinvestments almost surely decrease productivity and lead to labour market mismatches, but they do not portend a catastrophic implosion.
One final possibility is that our public model of university funding transfers the risk to taxpayers, which would mean that our student debt, while not at bubble proportions, is also not the full story. A substantial share of public debt must be considered as well. If that is the case, the question is not one of student solvency but provincial solvency. That, however, is a debate for another time.
Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies