Justin Trudeau and the Liberals released their housing platform this week and are promising more affordable housing measures.JENNIFER GAUTHIER/Reuters
The fundamental problem in Canadian housing is that there’s not enough of it.
For most of the past three decades, Canada annually built fewer homes than during the peak years of the 1970s, when the country’s population was more than a third smaller than today. A persistent lack of supply, combined with a long period of low interest rates and high demand, led to a wild surge in home prices. Over the past year, half of Canadian cities have seen prices jump at least 30 per cent.
In decades past, rising home prices were usually seen as a good thing. Two-thirds of households are owners, so higher prices enriched them. As a result, problems in housing did not have as prominent a place on the ballot. But as ownership slips out of reach for many younger people, it has been pushed to the front of this summer’s election campaign. Where the situation is worst – Ontario and British Columbia – polls peg it as a top-three issue.
In the long run, the answer is more supply. While the pace of housing completions is, finally, higher than a half-century ago, it remains lower on a per capita basis. The Liberals and Conservatives are both proposing to use Ottawa’s fiscal leverage to address that.
But more homes are not built in a day, and your average Canadian voter wants answers now, not years from now. So, in a short five-week election campaign, the age-old political lure of giving free money to home buyers, and pretending it’s a housing affordability strategy, is back.
Coming up with imaginative methods for putting government money into the pockets of home buyers goes back decades. The grandfather of them all is the idea of allowing buyers to borrow from their own retirement savings to spend on a home. Is this a good idea? Not really. Is it perennially popular? Indeed. It became policy in 1992, when the Progressive Conservative government first allowed for a tax-free withdrawal of $20,000 from RRSPs for a home down payment. It was supposed to last only one year; that was 29 years ago. In 2019, the Liberals increased the withdrawal limit to $35,000.
The Liberals, who released their housing platform this week, are promising more such measures. They made “unlock home ownership” the first and most prominent of their plan’s three pillars. What they’re proposing may attract votes, but it won’t deflate an overpriced housing market. It will tend to do the opposite.
The Liberals’ biggest proposal is a new home savings scheme. People under 40 would be able to save up to $40,000, tax sheltered and tax-free on deposit and withdrawal. The idea may prove popular, but the main result of using the tax code to give more bidders more money to bid with will be higher sales prices.
The Liberals’ other good politics/bad policy idea involves doubling the first-time buyers tax credit, to $10,000. (The Conservatives first introduced it in the late 2000s.)
The Conservatives also dabble in market stoking. They promise to “encourage” mortgage loans of seven- and 10-years (the standard has long been five), to make them more affordable. And they want to ease mortgage insurance rules that cap purchases at $1-million for people with down payments of less than 20 per cent. Both would mean that, ta-da, you can spend more.
Canadians looking to buy a first home in 2021 are staring at a market whose rot has been years in the making. Prices are out of reach for many in part because there simply are not enough homes, and the lack of supply is largely the result of building restrictions in most urban areas that prevent density. Add a growing population, a growing economy, and the cheap money of rock-bottom interest rates, and the result is predictable.
Working out of this mess will take years. And simply putting more money in the hands of those bidding for a house won’t bring down housing prices any more than giving free cash to every bidder at an art auction will allow each of them to afford a Picasso. Promises to flush the market with more money, subsidized by taxpayers, are not politically surprising. But they will do more harm than good.
The real answer, the difficult answer, the long-term answer, is supply – everything from more rentals and more homes for purchase to a much-needed expansion of affordable housing. And on this, the parties have all pledged a raft of ideas. More on that, next week.
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