The foreign buyer issue is a misdirect; we must loosen housing supply

Brian Lee Crowley is managing director and Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.

The secret to most magic tricks is misdirection: The magician works tirelessly to make you look in one place while the trick is actually being accomplished elsewhere. Politicians in British Columbia, Ontario and Ottawa have been brushing up on their magic skills recently as they struggle to make us look in one direction – namely at foreigners – for the culprits behind the outsized house-price rises in metropolitan Toronto and Vancouver. The truth, however, is that those politicians have spent decades creating the conditions for out-of-control housing costs.

While they're energetically drawing our attention to foreign purchasers with one hand, their other hand has been surreptitiously engaged in a campaign of provincial and local restrictions on the housing supply.

Housing affordability has rightly become one of the top policy issues facing the country. Median households must now dedicate 71.7 per cent and 119.7 per cent of their pretax incomes to own a single-family detached house in the Toronto and Vancouver areas, respectively. Taxes on foreign purchasers have already been enacted in British Columbia, and may be coming in Ontario in response.

Yet foreigners didn't cause the number of single-family detached houses in the Vancouver area to remain essentially unchanged for the past quarter-century. Nor did they limit detached-house construction in the Toronto area in 2015 to its lowest level in 36 years. It's time for politicians to own up to their role in pushing house prices out of reach for the middle class.

This is now a matter of national interest. Not only is home ownership positively associated with a raft of economic and social benefits that strengthen families, communities and the country, it's a national imperative that affordable and responsible home ownership be available in Toronto and Vancouver.

These two centres are where virtually all the net job creation has occurred in Canada in recent years, and they are increasingly the apex of investment, innovation and middle-class opportunity. Unaffordable prices in these cities not only preclude low- and middle-income Canadians from climbing the economic ladder, but they also constrain the national economy.

The evidence that foreign investment is the key cause of rising prices is, to say the least, unconvincing. The same cannot be said for the role that poor government policy is playing to limit middle-class aspirations and constrain the economic potential of our major cities.

Present policies such as green belts and land reserves, exclusionary zoning and obstructive building and construction regulations are directly or indirectly designed to manage the housing supply – including the types of homes that are constructed. One can debate the utility of these "urban containment strategies," but it's not debatable that they're making home ownership more difficult, rather than easier. A major body of research, including by Harvard economist Edward Glaeser, has shown that restrictive land-use regulations are a major impediment to housing supply and in turn drive up prices.

Just consider: B.C.'s Agricultural Land Reserve encompasses 20 per cent of the land in the Lower Mainland and is roughly the size of full countries such as Slovenia, Israel and the Bahamas, and twice as large as the amalgamated city of Toronto. Yet B.C.'s land reserve is largely off-limits for home building.

The question is: What can and should the federal government do about housing affordability challenges and the extent to which provincial and local policies are largely responsible?

The answer we offer in a new Macdonald-Laurier Institute study being released today is that Ottawa should use its spending programs to spur provinces and municipalities to stop obstructing housing supply, the rise of the middle class and the chief engines of growth in the country.

Ottawa's new social housing and infrastructure funding to the provinces and cities should be conditional on liberalizing reforms to restrictive zoning and housing regulations.

Why reward provinces and municipalities with affordable housing and infrastructure funding if these same governments are impairing housing affordability and in turn undermining the national economy and middle-class aspirations?

Federal power should thus be used to catalyze reform to government-imposed barriers to affordable and responsible home ownership.

It would be an important step in delivering on Ottawa's goals of inclusive growth and middle-class opportunity. And this starts by calling a halt to the provincial and municipal misdirection that has allowed this tired magic act to continue far too long.