Deficits and the refugee crisis are the issues dominating the federal election campaign, but for the eight million Canadians living in greater Toronto and Vancouver, there is one subject that will still be discussed around the dinner table for months to come: soaring home prices. Markets in these two cities have decoupled from national housing trends even further. The Teranet–National Bank House Price Index found that prices increased 9.7% in Vancouver and 8.7% in Toronto last month compared with a year earlier, whereas the rest of the country averaged just 0.2%. Affordability is worsening, too. In a recent report, RBC concluded that servicing the mortgage on a two-storey house (assuming 20% down) would cost the average Toronto household 67.5% of its pre-tax income. In Vancouver, it’s an eye-popping 90.6%.
All of this explains why, when campaigning in Vancouver in August, Stephen Harper promised $500,000 to study the impact of foreign home buyers on these two markets, a group some believe is driving prices higher. In a similar fashion, Justin Trudeau announced on Sept. 9 that a Grit-led government would “review” the distinctive affordability issues in Vancouver and Toronto. (The NDP has so far refrained from singling out the two cities in its housing platform.)
Housing experts applaud the parties’ intentions to ask questions about market forces before they start shooting, but the reality is there’s only so much a federal government can do to corral these runaway markets. What they’ve proposed so far isn’t likely to help first-time buyers much. Other options available are politically unpalatable and risk alienating the very voters the next government seeks to placate. Despite the candidates’ concern about affordability, the Toronto and Vancouver markets will continue to move according to their own agendas.
The feds have previously made substantial policy changes to temper the housing market. “The biggest actions have already been taken,” says Craig Alexander, vice-president of economic analysis for the C.D. Howe Institute. Since 2012, Ottawa has changed mortgage insurance rules four times by increasing down payments and shortening the period buyers have to repay their loans. It has withdrawn mortgage insurance for investment properties and homes valued over $1 million. More recently, the Tories changed the rules for immigrant investors such that they can’t simply invest in Canadian real estate or fixed income and call it job creation. Yet these tweaks paled in the face of the market’s momentum. “We found that the effect of those changes wore off in four to six quarters,” says Diana Petramala, an economist at TD Bank. “The market just readjusts to a new equilibrium and starts back up again once the impact of the new regulation fades.”
One surefire brake on house-price increases would be a hike in interest rates, Petramala says, but that is the bailiwick of the Bank of Canada. That institution has other concerns, the most immediate being inflation and generalized economic growth. Moreover, if the end goal is affordability, higher interest rates will produce the opposite effect by increasing mortgage carrying costs.
This mostly leaves the feds tinkering around the edges. The Liberals and Conservatives have both vowed to expand the RRSP withdrawal program that allows buyers to use retirement savings for a down payment, provided they replenish the savings (with no tax deduction) over subsequent years. The Conservatives want to boost the withdrawal limit to $35,000 from $25,000. The Liberals, in contrast, would widen eligibility rules to allow more Canadians in different life situations (moving for work, for example) to take advantage of the program. Economists mostly dismiss this as a minor gesture. If anything, freeing up more money to chase escalating prices only drives the market higher, making this move counterproductive.
Meanwhile, a rising chorus in Toronto and Vancouver is calling for special restrictions to be placed on foreign property buyers, who some contend are largely responsible for multimillion-dollar home purchases. That concern is likely behind the Conservatives’ pledge to study the role of foreign buyers, and the Liberals’ more general plan to look at the affordability issues in both cities. Research by David Ley, a University of British Columbia geography professor, has found that purchases by wealthy immigrants and foreign real estate speculators have a “trickle-down effect” that helps inflate prices across the housing spectrum. Australia, New Zealand and Singapore have already taken steps to lessen the impact of foreign money on local real estate markets. Depending on the form they take, restrictions on foreign buyers would alleviate demand from less price-sensitive foreign buyers, advocates argue. Australia’s rules, for example, limit foreign buyers’ purchases to new homes, effectively taking them out of the detached house market in city cores. Even with these rules in place, however, house prices in Australia still jumped by 10% year-over-year, driven by desirable markets such as Sydney and Melbourne.
This line of thinking is not without controversy, either. Some commentators object to the whiff of xenophobia surrounding policy that might target offshore buyers. “Let’s put a stop to the insidious characterization of Chinese investors as villains in our affordability problems,” wrote Yuen Pau Woo, president of HQ Vancouver and former CEO of the Asia Pacific Foundation of Canada, in an op-ed in The Tyee.
Ultimately, the root of the current imbalance of power between those Canadians who own homes and those who do not lies in the Canadian tax code, says Thomas Davidoff, an economist at the University of B.C.’s Sauder School of Business. He recommends shifting the tax burden off personal income and onto real property. The feds could initiate this by striking a deal with lower levels of government to raise property taxes across the country, kick the proceeds up to the federal level and provide broad-based income tax relief, effectively taking money from the people who own real estate and giving it to those who don’t. “That’s the most direct and least harmful way to do it,” Davidoff says. Such a change would allow renters to better afford to live in the city of their choice and save for a down payment. This is how the U.S. treats taxation, and Davidoff argues it’s the reason home ownership is more attainable there than in Canada.
That plan, however, would face daunting challenges in the political arena. Roughly two-thirds of Canadian adults are homeowners, and they would likely resist such a change. It’s also naive to expect co-operation from different levels of government on the issue. Last spring, Vancouver Mayor Gregor Robertson wrote B.C. Premier Christy Clark, requesting an amendment to the city’s charter that would enable it to raise tax rates on the most expensive homes and levy a tax targeted at flipping. Clark turned down the request on the grounds that meddling in the market in this way might disadvantage existing homeowners.
Fortunately, Davidoff has another, more workable suggestion that’s already in the wheelhouse of the Canada Revenue Agency: Cap the capital gains tax exemption for primary residences. The Internal Revenue Service in the U.S. already does this, applying income taxes on gains from home sales in excess of $250,000 for individuals and $500,000 for a married couple filing jointly. A similar approach in Canada would discourage speculation in the property market (which is believed to contribute to price appreciation) and only penalize people who have already realized a substantial gain.
Whether this is the kind of intervention voters want, however, is an open question. Slapping a new tax on this long sacrosanct asset class—even amid worsening affordability—might be a very tough sell.
MORE ABOUT HOUSING MARKETS & FEDERAL ELECTION 2015:
- Why Canada’s political leaders won’t talk about the housing bubble
- What will the next government do about the Bank of Canada?
- Can any party turn around Canada’s ailing manufacturing sector?
- Deficits now seem inevitable. How do the parties plan to manage them?
- How Toronto became the world’s hottest luxury home market