Real Estate

Opinion: Supply, Not Incentives, Will Solve the Housing Crisis in Canada

Supply, not incentives, are what's going to solve the housing crisis

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This election, our leaders have promised tax credits and home buyers incentives to cool the rapidly heating housing market. But to deal with the housing crisis in Canada, what we really need is more affordable housing, writes investing expert Robb Engen.

House prices in Canada have gone absolutely bonkers since the pandemic began, increasing by about 25% as of August 2021. The Canadian Real Estate Association said national home prices have soared 200% in the last 16 years. And it triggered a housing crisis in Canada.

It’s not good news for young people who are trying to get their foot in the real estate door. Young Canadians are being priced out of the housing market in major centres like the GTA and Greater Vancouver, where the average home sells for more than $1 million. Record low-interest rates combined with the work-from-home phenomenon caused by the pandemic have fuelled Canadian real estate’s meteoric rise.

But as the question of housing affordability for Millennials and Gen Z reaches crisis mode, Canadians head into a federal election with all three major federal parties offering solutions that only exacerbate the problem. Young Canadians don’t need an extra savings account or looser lending standards. They need more affordable homes built and they need them built now.

Housing Carrots

The incumbent Liberal party promised a new investment account, called a First Home Savings Account, which would allow Canadians under the age of 40 to save up to $40,000 to put towards a new home. Contributions would be tax-deductible, like an RRSP contribution, while withdrawals would be tax-free like they are with the Tax-Free Savings Account (TFSA). The Liberals have also pledged to double the current $5,000 First Time Home Buyers’ Tax Credit, resulting in a potential rebate of $1,500.

Meanwhile, the federal Conservative party wants to encourage banks to provide longer mortgage terms of 7-10 years to help reduce mortgage payments and relax the current mortgage stress test rules to make it easier to qualify for a mortgage, particularly for small business owners.

The federal NDP housing platform also promises to double the First Time Home Buyers’ Tax Credit, plus increase the length of time needed to pay back a mortgage (the amortization period) from 25 to 30 years. The NDP also pledged a $5,000 per year rent subsidy for families.

The problem: Canadians already have access to the Home Buyers’ Plan, which allows first-time buyers to withdraw up to $35,000 from their RRSP (so, up to $70,000 for couples), plus their TFSA room in which to save for a down payment. In addition, the Liberals launched a shared-equity program in 2019 to help first-time home buyers enter the market (albeit with little uptake to date).

The incentives offered by the Liberals encourage more buying activity but do nothing to immediately address the lack of supply, particularly in affordable housing.

The Conservatives offer incentives on the affordability side, trying to make it easier for small business owners to qualify and then curiously wanting to increase the length of mortgage terms, which tend to come with higher interest rates than shorter terms. Again, this aims to address affordability which only adds fuel to the demand side of the equation.

The NDP zeroes in on rent subsidies but ignores the unintended consequence of landlords increasing rents when their tenants are being subsidized by $5,000 per year by the federal government. Their promise to increase the mortgage amortization period allows home buyers to afford more expensive homes but may drive up demand and worsen the existing crisis.

READ MORE: How to Use the Home Buyers’ Plan

Housing Sticks

While the above incentives serve to increase demand for housing — the exact opposite of what’s needed to curb rising home prices — each of the major federal parties also pledges to address issues that they believe are responsible for driving up prices.

The Liberals proposed a Home Buyers’ Bill of Rights that bans “blind bidding” – a practice that has led some buyers to pay well above the asking price. They also propose a temporary ban on new foreign ownership of Canadian homes (for two years) and promise to tax foreign-owned vacant land inside of urban areas. The Liberals also propose a surtax on excessive rent increases and aim to stop landlords from evicting tenants to complete major renovations.

The Conservatives also proposed to stop foreign investors from owning Canadian real estate for two years, while pledging to encourage foreign investment in rental housing.

The NDP platform also tackles foreign ownership and proposes a 20% foreign buyer tax on home sales to buyers who are not Canadian citizens or permanent residents.

The problem: The Liberals’ proposed crackdown on blind bidding adds much-needed transparency to the home buying process. But the focus on banning and taxing foreign ownership is a red herring that fails to address the real affordability crisis in Canada. Foreign ownership accounts for just 3.4% of all homes in Toronto and 4.8% of homes in Vancouver, according to the most recent data from Statistics Canada. It’s an easy target since foreign buyers don’t vote in Canada, but ultimately does little for improving affordability and accessibility.

READ MORE: Buying A House in Canada: A Guide to Buying Your First Home

Slower, More Complicated Solutions

All three major parties brought out the carrots and sticks in their platforms to help immediately address housing. These solutions likely go into effect immediately (at least in the next federal budget), with most of the carrots leading to increased demand for housing, and most of the sticks doing little to quell that demand.

Most experts agree that the main problem is a lack of adequate supply, especially when it comes to rental housing and affordable homes for first-time buyers. The federal parties do address the issue of supply in their platforms.

The Liberals plan to build upon its National Housing Strategy and pledge to build, preserve, or repair 1.4 million homes in four years.

The Conservatives plan to incentivize the private sector to build more homes – proposing to build one million units in three years.

The NDP plan proposes to spend $14 billion to build 500,000 affordable housing units in the next decade.

The problem: The National Housing Strategy was introduced in 2017 and pledged to spend $70 billion on housing over 10 years. Two years later, a report found that the federal government had built just 63,300 new housing units. It would take a massive effort between federal, provincial, and municipal governments, and the private sector, to achieve the parties’ proposed ambitious targets (although the NDP’s 500,000 units over 10 years is a much more realistic target).

Final Thoughts

The housing crisis is a key issue in this year’s federal election. But none of the three major parties offer meaningful or realistic solutions to deal with the lack of housing supply. They don’t go far enough to address homelessness, build more rental units, or help Indigenous people with housing accessibility. They throw around increased supply numbers that ultimately are up to provinces and cities to build. And they fail to acknowledge that the surge in home prices and erosion in housing supply happened during a pandemic when immigration was temporarily low.

Federal parties shied away from solutions that would have an immediate impact on housing prices, such as taxing the capital gains on principal residences or discouraging short-term house flipping. Indeed, no leader wants to be responsible for a decrease in housing prices, so they continue to add fuel to the housing fire with new incentives.

Young Canadians want to know if they can still pursue the dream of homeownership without having to move away from urban centres. They want to know what politicians will do to ensure they don’t get priced out of owning a home forever. In this election, the federal party leaders failed to meaningfully address these issues, leaving generations of Canadians twisting in the wind.

A message to federal parties: Enough with the incentives. Enough with the pie-in-the-sky home-building projections. Show us how you plan to build the number of affordable homes needed to keep up with demand, and then deliver on that promise. Take bolder action to address runaway home prices by taxing a portion of capital gains on principal residences or working with municipalities to increase property taxes. Do something meaningful before an entire generation is priced out of the housing market forever.

READ MORE: Opinion: Tax-incentives and Building More Homes Won’t Solve Canada’s Housing Crisis. Non-Profit Solutions Will.

Robb Engen

Robb Engen

Robb Engen is a leading personal finance expert in Canada and the co-founder of Boomer & Echo, an award-winning personal finance blog. He writes a monthly column in the Toronto Star’s Smart Money section and is a fee-only advisor who helps Canadians at different ages and stages get their finances on track and prepare for retirement.

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