A realtor’s sign on the front yard of a Lond St. home in Toronto’s Seaton Village neighbourhood, is photographed on Mar 8, 2022. Fred Lum/The Globe and Mail.Fred Lum/the Globe and Mail
A core competency of any successful politician is the ability to create the illusion of movement, while actually doing nothing.
Chrystia Freeland is a very successful politician.
The federal budget the Finance Minister unveiled this week puts housing front and centre. It nods in all the right directions, gestures toward all the key interest groups. And yet, it leaves us pretty much exactly where we started.
Did you expect anything different?
Every Canadian political party faces the same dilemma when it comes to housing. On the one hand, it wants to signal it is solidly on the side of young Canadians who can’t afford homes. On the other hand, it also wants to reassure older Canadians it is not coming after all those huge, lovely gains they have accumulated on their principal residences.
In short, every politician wants to stand four-square for affordable housing while staying adamantly opposed to any significant decline in home prices. Yes, that is as nonsensical as it sounds.
Housing-focused budget targets foreign buyers, promises to double the pace of home building
Liberals stake their reputation as inflation-fighters with help for homebuyers in budget 2022
Provincial, municipal governments praise 2022 federal budget for its focus on the housing crisis
The contradictions are on full display in budget 2022. It says all the right things, while doing nothing that would seriously address the housing problem it identifies.
The core of that problem, as the budget notes, is a big gap between demand and supply. We have a lower number of homes per person than nations such as France, Germany or Japan. Yet, demand is rising because of a growing population.
So, what is there to be done?
One approach would be to look for ways to tamp down demand. Ottawa could, for instance, introduce a modest tax on capital gains on principal residences. There is no particularly good reason why gains on real estate should be privileged over gains on other types of investments.
Number of Homes per 1,000 persons
Ratio
700
600
OECD Average
500
400
300
200
100
0
France
Germany
Japan
Britain
Canada
U.S.
Australia
New
Zealand
the globe and mail, Source: 2022 federal budget
via Organization for Economic Co-operation
and Development
Number of Homes per 1,000 persons
Ratio
700
600
OECD Average
500
400
300
200
100
0
France
Germany
Japan
Britain
Canada
U.S.
Australia
New
Zealand
the globe and mail, Source: 2022 federal budget
via Organization for Economic Co-operation
and Development
Number of Homes per 1,000 persons
Ratio
700
600
OECD Average
500
400
300
200
100
0
France
Germany
Japan
Britain
Canada
U.S.
Australia
New
Zealand
the globe and mail, Source: 2022 federal budget via Organization for Economic Co-operation
and Development
The Liberals could also rethink – at least in the short-term – the supersized immigration targets they have unveiled. They are aiming to admit roughly 400,000 newcomers a year, which is a big shift from the 250,000 or so people that were admitted annually before the party came to power in 2015. All those additional Canadians will only add to housing demand.
But neither the taxation lever nor the immigration lever merit attention in Ottawa’s budget. The reasons are obvious: Either move would be political poison. Middle-class homeowners abhor the thought of being taxed on their real estate wealth, while many of us sympathize with the case for higher immigration – especially at a time when war is displacing so many Ukrainians.
Fair enough. But note the contradictions here: Ms. Freeland is complaining about a shortfall of housing supply, while persisting in incentivizing home-buying through the tax system and continuing with immigration plans that would admit the equivalent of a mid-sized city to Canada each and every year. At the very least, this suggests Ottawa is not exactly bursting with zeal to get tough on runaway home prices.
Its policy muddle grows even more confusing when you add in the budget’s plans for a new Tax-Free First Home Savings Account that will encourage young people to save up for a house. If successful, the program will encourage even more demand for housing. Apparently, you can fight a red-hot housing market by adding even more fuel to the fire. Who knew?
Ms. Freeland appears to be counting on a miraculous surge in housing supply to make everything come out right. As her budget notes, Canada builds about 200,000 housing units a year, including both homes and condos. It needs to double that pace of construction to keep up with projected demand over the next decade.
The Liberals’ big initiative to create a surge of new building is a Housing Accelerator Fund that will dispense $4-billion over five years to encourage the construction of 100,000 new housing units. But the budget, which says “the fund will be designed to be flexible to the needs and realities of cities and communities,” does not make clear how this will work.
Furthermore, the amounts seem paltry. As Stephen Brown at Capital Economics notes, “the funding per home is just $40,000, which will not even offset the 30 per cent rise in the cost of residential construction projects since the pandemic.”
The federal government’s big problem is that it has no direct control over the sluggish planning and permitting processes that stand in the way of more new construction. The real power in these areas belongs to municipalities and provinces. They tend to reflect the attitude of residents who don’t like the idea of adding density to leafy single-family neighbourhoods. That not-in-my-backyard mentality hasn’t shifted during Canada’s long housing boom, and it seems unlikely to suddenly change now.
So, don’t count on the new budget to radically transform the landscape. What is far more likely to cool the housing market is a rise in interest rates. The Bank of Canada is widely expected to double its policy rate next week, bringing it to 1 per cent. More hikes are likely to follow.
Of course, if higher rates do shake home prices, it will be central bankers, not politicians, who take the blame. Which, come to think of it, might have been the real point of the budget.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.