Good Morning!
Housing is a hot topic in Canada’s federal election.
A poll this week by Nanos Research found that more than 40% of the Greater Toronto residents surveyed identified affordable housing as the single biggest issue, CP24 reports.
Politicians have rushed to respond with proposals to make life easier for homebuyers. Yet some economists have their doubts that the government measures will have much impact.
In fact, they might even make it worse.
Simply put, policies that reduce the costs of buying a home raise demand and in turn prices.
“Buyers that have the immediate opportunity to purchase under a new incentive will benefit, but shortly thereafter the increase in demand without an increase in personal income causes housing affordability problems for the next group of buyers,” said Deloitte chief economist Craig Alexander.
Stephen Brown of Capital Economics took a close look at what all three parties were proposing and came to much the same conclusion.
Liberal pledges to cut premiums on insured mortgages and double the First Time Home Buyers Tax Credit would put an extra $8,000 in homebuyers’ pockets, he said — but that’s chump change in Canada’s pricey real estate market.
“Even if the Liberals expanded those policies to boost affordability further, the issue with demand-side policies is that, unless there is also an increase in supply or a reduction in demand elsewhere, the initial boost to affordability will simply push up prices,” said Brown.
The Liberals have proposed policies to offset this including an “anti-flipping” tax, a temporary ban on new foreign ownership, and new funds to build more homes.
But Capital Economics doubts the first two will amount to much. “We’ve long been sceptical that foreign ownership has much of a role in driving up prices,” said Brown, adding that foreign ownership taxes introduced in Vancouver and Toronto in 2016/17 failed to stop home prices from soaring in those cities.
“The Liberal’s various new commitments to boost supply amount to about $7 billion in total over the next four years,” he said. “At $1.75 billion per year, that is little more than a rounding error compared to current annual expenditures on new residential construction of almost $100 billion and might therefore boost housing starts by just 1.8% at most.”
The Conservatives plan to build 1 million homes over three years, and the NDP, 500,000 over the next 10 years.
However, history has shown that Ottawa’s attempts to boost supply have not been terribly successful. A report by the Parliamentary Budget Office earlier this month said the federal government has spent less than half of the funding earmarked for its 2017 National Housing Strategy.
“The upshot is that the proposals to influence demand will be easier to implement than the measures to boost supply. On net, we suspect those demand-side proposals will provide a modest boost to house prices and do little to help affordability in the long run,” said Brown.
Alexander is also not optimistic that the next federal government will be able to do much to increase Canada’s housing supply, which is mostly the jurisdiction of provincial or municipal governments.
The most effective way for Ottawa to tackle the housing problem is to improve the performance of the economy and raise productivity, he said. More jobs and better wages would make housing more affordable on a sustained basis.
For younger buyers, Ottawa could improve housing affordability by breaking down barriers youth face in the labour market by making skills education more relevant, funding early learning and childcare and addressing racism and discrimination, said Alexander.
“All of this is an indirect way of tackling the housing affordability challenge, but it might be more effective than changing the direct incentives to facilitate home buying,” he said.
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