Work continues on a condominium project at the corner of Queen St. East and Mutual St. in Toronto on Aug 29.Fred Lum/The Globe and Mail
By the time you read this the federal government will have unveiled its latest suite of policies designed to address the crisis in the Canadian housing market, or at least the crisis in Liberal polling.
Whether these are likely to be any more effective than the policies it has introduced to date we shall see. But unless they have miraculous effects, the issue is likely to dominate our politics from now until the election, if only because the opposition has found it so effective.
A few points, therefore, to bear in mind as we suffer through the next couple of years:
This is a global phenomenon. Prices are higher in Canada than in many other countries, especially relative to incomes – but housing prices are soaring across the developed world. And for similar reasons: loose monetary policy, subsidized mortgages, restrictive municipal zoning laws, population movements. Everybody’s grappling with this.
It’s been decades in the making. It’s been clear for many years that Canada has a structural imbalance in its housing market, though perhaps the causes are clearer in hindsight. Much effort was expended in recent years blaming high home prices on foreign speculators and absentee landlords. So, boom, governments brought in new taxes on foreign buyers and empty homes. Nothing much changed.
Then it was all about low interest rates. So the Bank of Canada brought in 10 straight increases in its policy rate, driving mortgage rates to 6 or even 7 per cent. That knocked prices a bit lower, for a time, but they are already showing signs of reviving.
It’s a shortage of houses, not a surplus of people. Now everyone’s convinced the problem is high immigration. No doubt there’s some truth in this, in specific markets – the extraordinary, seemingly unanticipated surge in the number of foreign students enrolling in Canadian universities and colleges has overwhelmed the supply of student housing. Maybe a pause there would help.
But we had higher immigration rates in the past without igniting a housing crisis. And prices were already at stratospheric levels long before the immigration surge of the past two years. I don’t disagree that made things worse, but it’s the long-term decline in the supply of new housing that has set us up for this.
It won’t be solved by government housing programs. There is a role for public housing, for people with particular needs: those on low incomes, or with mental and addiction issues. But the general crisis of affordability of Canadian housing is of a scale that is far beyond government budgets to remedy, even assuming they had a good idea of what or how or where to build.
A study for the Macdonald-Laurier Institute found that, even if governments restricted themselves to the 10 per cent of households (two-thirds of them renters) the Canada Mortgage and Housing Corp. defines as in “core housing need” – never mind the 3.5 million to four million new units the CMHC estimates will need to be built between now and 2030 to take the pressure off the market – and even if public assistance were confined to construction costs alone, and even on the most conservative assumptions about these, it would cost between $200-billion and $300-billion.
That’s not going to happen. There is lots that governments can do to incentivize private construction – notably by getting out of the way. But this is going to have to be financed, for the most part, by private capital, and private savings, as it always has been.
Prices will have to fall. The new federal Housing Minister, Sean Fraser, raised eyebrows shortly after his appointment by suggesting the government hoped to boost the supply of (presumably affordable) new housing without causing the prices of existing homes to fall. This is, to say the least, unlikely.
Housing market segments are not sealed off from each other. If you increase the supply of new homes, some potential buyers of resale homes will decide to buy new instead. Some existing owners will put their homes up for sale, finding they can get more house for the money (or the same house for less money) among the new stock.
Ultimately, supply is supply. If there’s more of it, relative to demand, prices will tend to fall. And if they do? The baby boomers had a good run. Prices have climbed so far, so fast, that in all but the most severe price declines, all but the most recent purchasers should still come out well ahead on their investments.
That’s still asking a lot of people to accept – and asking even more of politicians to risk their wrath. But nobody should expect the price of their investments will always go up, never go down. Yes, the price decline in this case would be the result of government policy. But so was the price rise – not only by artificial curbs on supply, but by artificial boosts to demand. Which is to say …
It won’t be solved only by increasing supply, but also by restraining demand. To build 3.5 million new homes in seven years, or 500,000 a year, on top of the roughly 250,000 a year we are building now, is a tall order – maybe too tall. It’s fine to talk about taking a “wartime” approach to the problem, but making tanks and rifles is a different and simpler problem than constructing new housing – you don’t have to be quite as concerned about the preferences of the end customer, for one thing.
Ramping up construction at such a rapid pace has real potential for disaster. To increase the supply of housing, after all, means increasing the demand for the labour and resources that go into it. If there are kinks in the supply of these, we may find we have created new market distortions in place of the old – distortions that may have the effect of making this new housing much more expensive than anticipated. To say nothing of the risk, in all the rush, of building a lot of housing no one wants to live in.
How exactly are we going to spur all this new construction? The current wisdom is that it is a simple matter of rezoning residential housing districts, historically restricted to single-family homes, to allow for the construction of multiunit homes and apartment blocks. But how many units will that actually add, per year – unless we bulldoze a lot of existing homes?
And is that where the most bang for the buck is? Aren’t we likely to add a lot more units, sooner, by increasing density along arterial routes? In so many Canadian cities these are lined with one- and two-storey retail that could be quite readily converted to five-storey retail-and-residential blocks.
At any rate, supply is only one part of the equation. The Canadian housing market is distorted not only by restrictions on supply, but by subsidies to demand. The most overt of these, such as the tax incentives for first-time home buyers, have lately come under scrutiny as the false solutions that they are. But there are many others, deeply embedded in the housing landscape, of which we are less conscious.
A serious reform of housing policy would look closely at the role played by the CMHC. Like the first-time home buyers incentive, the CMHC’s mortgage loan insurance is a program intended to make it easier for people to buy houses. But the inevitable consequence is to pump up the demand for housing, and to that extent make it harder for people to buy houses. Reducing the proportion of residential mortgages covered by the CMHC guarantees, as the C.D. Howe Institute has proposed, or risk-rating the premiums would help to offset this.
And then there’s the big one: the exemption from tax on capital gains arising from the sale of a principal residence, a tax preference worth more than $6-billion annually. Which, of course, gets capitalized into the value of the house. How much of the current premium on housing prices is explained by that one government intervention – a tax break that pays the most to the owner of the most overpriced house – I will leave to the economists to calculate. But it has to be considerable.
As with the others, this policy is defended in the name of the sacred Canadian right (or is it rite?) of homeownership. But …
Not everyone should own a house. Certainly not if they can’t afford it, which is effectively the aim of government policy – to load people up with homes they can’t afford, or couldn’t without government assistance. Certainly any decent society should wish to make sure that no one goes without a roof over their heads. But why such a pronounced preference in policy for owning a home, versus renting one?
Every investment adviser will tell you the first principle of investing is diversification. Yet it is government policy to encourage people to devote the bulk of their portfolio, 80 per cent or more, to exactly one asset class – housing – in precisely one location. This is risky enough for that householder; it’s even riskier for the economy at large.
And it’s bad for the economy in other ways. Land, and housing, are not productive assets: They don’t do anything to increase the economy’s productive capacity. The money people tie up in their homes is money they can’t invest in stocks or bonds, providing the capital companies use to pay for new plants and equipment.
That’s about the size of it, then. Even to begin to get us out of the mess we have got ourselves in will take not only unheard of increases in supply, but politically unpalatable restraints on demand.
Mostly, it will take tempered expectations, and shared sacrifice, all round. Existing homeowners will have to take a price cut. Some would-be homeowners will have to rent instead. Good luck to the federal political leader who tries to explain this to people.