How the Conservatives plan to tame Canada’s housing dragon

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Housing affordability might not be the most significant issue concerning Canadians today, but it is undoubtedly top of mind for voters as they evaluate the major parties’ competing platforms.

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Housing affordability surfaced as a significant concern during the last federal election campaign. Back then, however, it only worried voters in a handful of the more populous cities. The pandemic, though, has changed all that. As a result, housing affordability now concerns Canadians from coast to coast.

In the past, mid-sized and small towns boasted of their affordability. In 2017, Don Darling, Mayor of Saint John, N.B., even invited Torontonians to relocate and enjoy a congestion-free lifestyle with affordable housing.

But that was then. Since the onset of COVID-19, Canadians have shown an increased preference for larger homes in satellite towns and remote communities. Thus, places such as Hamilton, Kitchener-Waterloo, Ont., and Halifax have experienced massive increases in prices and sales.

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As for Saint John, the Canadian Real Estate Association (CREA) reported a year-over-year 24 per cent increase in the benchmark price for single-family homes in July. Still affordable relative to Toronto, but less so for local residents.

Canadians should be paying close attention to how the major parties plan to arrest the endless tide of rising housing prices. After all, we “have a housing crisis in Canada” where buying or renting a dwelling is slipping out of the reach of median income households, the Conservative platform states.

What distinguishes the Conservative platform is its recognition that the primary cause of worsening housing affordability is that supply “simply isn’t keeping up” with demand. “Governments have not let Canadians build enough housing to keep up with our growing population.” The Conservatives believe we need to build enough housing “not just to keep up with but to get ahead of population growth.”

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Canada’s housing supply has lagged demand for decades. That’s at least partly because supply skeptics have influenced Canadian policymaking by convincing governments that housing demand is the real culprit. Hence, governments have responded with new taxes and other measures to curb demand, while supply received scant attention.

The Conservatives have promised to build one million homes in the next three years. Annual housing starts in Canada have registered fewer than 220,000 dwellings, though there has been an uptick in construction activity this year. The seasonally adjusted annual rate of housing starts recorded 272,176 units in July 2021. Thus, one can expect around 750,000 units to be built in Canada during the next three years without any policy changes. Would an additional 250,000 houses be enough to help ease the pressure on housing prices is a good question to ponder.

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Building more housing of any type will not be sufficient. Instead, the kind of housing in high demand must be built on priority. Consider that the construction of single-family dwellings has declined over the years while new high-rise dwellings have been on the rise. At the same time, low-rise housing prices have escalated faster than other types because of the increase in the demand for them. Hence, increasing the construction of housing in high demand is necessary to address housing price inflation. To assist with the supply, the Conservatives propose to release at least 15 per cent of the 37,000 federal buildings.

The supply of purpose-built rental (PBR) housing has been the worst hit since the implementation of the capital gains tax (CGT) in the early 1970s. Successive governments have ignored the demand from PBR owners to index CGT to inflation and adjust it to encourage the construction of PBR dwellings, which are needed for low-income households that demand affordable housing and the security of tenure.

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The Conservative platform recognizes how CGT has contributed to the decline in rental construction and proposes to defer it on the sale of a rental property if the proceeds are reinvested in rental housing. A belated step in the right direction.

The Conservatives also propose to ban foreign investors from buying residential properties in Canada for at least two years. But they do intend to encourage foreign investment in PBR dwellings, even though foreign investors might be less likely to rush into investing in such dwellings because of future cash-flow uncertainty. Remember that provincial and local governments often impose restrictions on rental dwellings, including rent increases, a cash-flow risk that prudent foreign investors would prefer to avoid.

Other measures in the Conservative platform, such as increasing the limit on mortgage insurance and adjusting the stress test to assist non-salaried or self-employed borrowers, could further fuel the demand for housing. The timing of these measures is, therefore, critical. Increasing supply before growing demand is essential for stabilizing housing markets in Canada.

Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.