Feds should not get more involved in housing markets
Late last month, before the SNC-Lavalin affair took centre stage, Federal Finance Minister Bill Morneau made news by saying the Trudeau government is considering ways to make housing more affordable for millennials. While he didn’t mention any specific policy proposals, a one-size-fits-all housing plan for the entire country isn’t likely to solve affordability woes in expensive cities such as Toronto and Vancouver.
First, some background. The federal government is already heavily involved in the housing market, for better or for worse. It boosts demand, for instance, by offering capital gains exemptions on home sales (for primary residences) and interest-free borrowing from RRSPs to fund down payments. At the same time, it tries to tamp down demand by raising the minimum qualifying interest rate to obtain mortgage loans—the so-called “stress test.” If you think these policy objectives are at odds, you are correct.
The demand-side thinking favoured by many politicians often ignores the fact that both supply and demand conspire to set housing prices. To be fair, however, the federal government can be forgiven for not saying much about the supply-side of the equation, since local factors largely drive affordability concerns.
To wit, compared to five years ago, average home prices are up almost 60 per cent in the Greater Toronto Area and 70 per cent in Metro Vancouver (despite a recent dip). Yet during that same period, prices fell in struggling markets such as Calgary and Saskatoon. Clearly, house-price dynamics can vary wildly according to region. Prices have fallen in markets where stagnant or declining economic activity has reduced housing demand, and risen in cities where supply constraints have held back growth in the housing stock. It isn’t much more complicated than that.
Loosening supply constraints in markets such as Toronto and Vancouver will require provincial and municipal governments to tailor solutions accordingly, rather than a central plan hatched in Ottawa, which may actually hurt wannabe homeowners. Consider the federal stress test on mortgage applications enacted by the Trudeau government in early 2018. This policy, a response to affordability concerns in a few specific housing markets, has done collateral damage to other cities that weren’t facing the same challenges.
For instance, according to one analysis, a family hoping to qualify for a mortgage on a $300,000 house in Winnipeg now requires an income of roughly $60,000 (the median household income is $68,000) and a $60,000 down payment. It’s not clear why the federal government, in an effort to address skyrocketing home-price in Vancouver, should make it more difficult to qualify for a mortgage and buy a home in Winnipeg.
Similarly, other blunt policy instruments such as a first-time homebuyer tax credit likely produce unintended consequences that ripple through the country’s housing markets, such as more bidding wars in high-demand, low-supply markets.
Clearly, affordability concerns in specific markets are best tackled by local and provincial governments. As the governments that control the stock and flow of housing (through land-use regulation and the building permit process), they are far better suited to respond to spikes in demand by enabling the construction of more housing.
In federations such as Canada, it’s not uncommon for different levels of government to concern themselves in the business of other levels—again, for better or for worse. However, Ottawa should resist the temptation to further involve itself in housing markets (election year notwithstanding). Its involvement so far has largely ignored the critically important supply side of the equation and the (very) different needs of individual cities and towns across this vast country. In short, fixing housing markets is a job best left to others.