After three years of squeezing demand, governments should target housing supply

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Appeared in the Globe and Mail, July 30, 2019
After three years of squeezing demand, governments should target housing supply

Three years ago this month, the British Columbia government dramatically increased the property transfer tax rate paid by foreign nationals and corporations purchasing residential real estate in Metro Vancouver, followed by a host of similar policies—including a “speculation and vacancy tax” on homes deemed underused by the province, and an “empty homes tax” in Vancouver proper.

Other parts of Canada took note, with Ontario also raising the property transfer tax rate on foreign nationals in the Toronto area. And the Trudeau government imposed a new “stress test” on mortgage applicants in 2018. All these initiatives share a common assumption—that there’s too much demand for housing in Canada’s most expensive cities, and to boost affordability, something must be done to reduce that demand.

The result?

Although it’s difficult to establish causality, targeting certain sources of housing demand (foreign nationals, summer homeowners, first-time buyers) appears to have affected prices. For example, the property transfer tax increases on foreign buyers in B.C. and Ontario were followed by important declines in sale prices (approximately three to four per cent in Greater Vancouver and nine per cent in the Greater Toronto Area). Despite a rebound in prices (especially in Vancouver), the federal government’s 2018 increase of the minimum qualifying interest rate to obtain a mortgage (the “stress test”) was followed by another decrease or flatlining in home price growth in these two big markets.

So the demand-side policies of the past three years may have helped cool otherwise red hot housing markets. But the fundamental problem—broad housing affordability—remains unresolved. Compared to a decade ago, home prices remain more than 90 per cent higher in Vancouver and 120 per cent higher in Toronto. Virtually nonexistent rental vacancies also persist, pushing rents higher in already tough markets. For all their potential appeal (including their political popularity), demand-reducing policies have seemingly done little to restore broad housing affordability.

So what can be done?

The laws of supply and demand apply to housing, like any other good. By focusing primarily on demand, policymakers ignore half of the equation and overlook key tools in government’s arsenal to help reduce housing prices.

Thankfully, supply-side policy seems to be gaining currency in Ontario. The Ford government’s “housing supply action plan” adds some much-needed perspective in the housing policy debate. Notably, the government wants to update key land-use planning policy to encourage the rapid approval and construction or more housing. This follows important legislation passed earlier this year which, among its many elements, includes capping and streamlining the fees municipalities charge homebuilders, the deferral of such fees for rental development, and permitting more secondary suites (such as laneway and basement units). While more could be done to increase the supply of housing, such as opening up the so-called “yellow belt” of lower-density residential neighbourhoods to more development, the government appears to be moving in the right direction.

Over the past three years, governments across Canada—notably in B.C., Ontario and Ottawa—have overwhelmingly targeted the demand-side of the housing equation. Despite recent cooling in home prices, housing in the country’s most expensive cities remains in high demand and out of reach for many renters and would-be buyers. It’s time to shift the housing affordability discussion away from discouraging buyers and towards the construction of more homes. Governments must recognize that supply is half of the equation.