Politicians hoping to win our hearts and minds better have a convincing solution for housing un-affordability. Their electability depends on it.
Housing costs are causing more stress for voters than all but a handful of other issues. In fact, survey after survey lists housing affordability as a top five concern keeping Canadians up at night.
With the election just 34 days away, it’s time to understand if our political leaders have a way out of this mess, or are all hat and no cattle.
Here's our take on how the four main parties plan to address middle-class housing "affordability," and their chances of succeeding:
- Review the mortgage stress test
- Conservative Party leader Andrew Scheer said his party is “absolutely committed” to reviewing the mortgage stress test. Well, that’s absolutely fantastic…as long as he doesn’t make it worse.
- The stress test forces all Canadians seeking financing from a mainstream lender to prove they can service their mortgage debt at much higher interest rates—rates that are sometimes over double their actual rate (God forbid, mortgage rates double).
- The minimum stress test rate equals the most common Big Six bank’s five-year posted fixed rate.
- Review aside, Scheer has already promised to end the mortgage stress test on mortgage switches.
- Quick take: The stress test is a buzz-kill to many a newbie buyer, but it’s a necessary evil because, without it, home prices could be thermospheric instead of just stratospheric. But it needs some tweaks. Letting those big naughty banks (actually they’re not so bad if you own stock in them) control the minimum stress-test rate is dumber than frying bacon in the nude. It keeps the stress test from adapting quick enough to changing economics. Worse yet, the stress test bars roughly one in 10 renewers (who add no new risk to the system) from switching lenders for a better deal. Consumers lose. Banks win. Who the %#$@ came up with this idea?
- Re-introduce 30-year Insured Amortizations
- The Conservatives say they’ll consider re-introducing 30-year amortizations on insured mortgages.
- Amortizations over 25-years were banished from Canada’s insured mortgage market in 2012 to slow over-borrowing.
- Note: This only applies to insured mortgages. Most new uninsured borrowers already jump on amortizations over 25 years.
- Quick take: Amortizations are like rope. Whether there’s 25 feet or 30 feet of it, imprudent borrowers can still hang themselves. The benefit of a longer amortization is that mortgagors can re-purpose cash flow to more productive uses (no, not on an 88 inch 8K OLED TV, but on paying down higher-cost debt or investing). On the other hand, as CMHC’s CEO is quick to point out, 30-year amortizations can juice home prices short term, working against price affordability. So, until the market can create enough housing supply to satisfy Canada’s growing buyer army, letting more borrowers qualify under 30-year amortizations won’t help the affordability cause. As a compromise, borrowers could be allowed to set their payments using a 30-year amortization if they qualify at a 25-year amortization. Alternatively, 30-year amortizations could be reserved for those with enviable credit only.
- Relax the First-time Home Buyer Incentive (FTHBI)
- Reviews on the current FTHBI are in. Young buyers mainly support it (not that they understand it all). But it gets two thumbs down from first-timers in high-cost real estate markets, since it restricts buying power.
- The Liberals see the errors of their ways and have proposed increasing the FTHBI income and leverage limits for first-timers in Victoria, Vancouver and Toronto (but only if they get re-elected).
- The maximum purchase price for buyers in those cities would rise from the mid-$500,000s to nearly $800,000.
- Quick take: Hey, if you like free money, and you don’t plan to hold your home long term and/or expect average price appreciation at best, check it out. But truth be told, the FTHBI applies to few buyers regardless, benefits buyers who would qualify without it, is a headache to administer, was costly to launch and is a modest risk to taxpayers. Not to mention, figuring out how it works is like solving a Rubik’s Cube (without breaking it and putting back the pieces, my favourite method).
- A New Speculation Tax
- The Liberals want to slap a one percent annual speculation tax on non-citizen/non-permanent residents who buy a home.
- Quick take: Nothing excites free-spending politicians like more tax revenue. But adding another layer of tax on foreign buyers, while a clear vote-getter, risks de-globalizing our world-class cities. Hotspots like Vancouver and Toronto are gateway cities that attract enormous foreign capital and cultural diversity. That capital creates J-O-Bs and tax revenue. It’s a reputational risk to broadcast to the world that if you’re not from here, you’re second-class—i.e., not worthy enough to buy on equal terms as locals. Dissuading capital investment from taxpaying foreign nationals—who don’t burden our public services to the same degree—sounds good on paper, but only if you don’t read the whole paper. In B.C., less than 1 percent of homeowners pay the tax. That means the tax adds just a trivial supply of new housing for Vancouver families. And those families must pay up to seven-figures for that housing. Lastly, but not least, foreign buying is a big deal in only a handful of cites, so most Canadians will never see benefits from this scheme.
- Re-introduce 30-year Insured Amortizations
- Quick take: Where have we heard this before? See above.
- Impose a Foreign Buyer’s Tax
- The New Democrats propose a 15% foreign buyers' tax on home purchases by non-Canadians and non-residents.
- Quick take: As mentioned, taxing foreigners is political propellant. Most Canadians are heavily in favour of sticking it to foreigners who buy up our sacred birthright: condos and single-family houses. And while we know foreign buying adds somewhat to home prices (especially in the $1 million+ segment), the risks of discouraging international investment are hard to quantify. And we shan’t forget. More taxes don’t dig us out of our biggest predicament: too few cost-effective, middle-class homes where the jobs are.
- Double the first-time homebuyers' tax credit to $1,500
- Quick take: Here’s another idea from the voter candy store. A $1.5k handout won’t move the needle on addressing affordability in a country where the national average home price is approaching half a million bucks. Back to the drawing board on this one...
- Create 500,000 New Affordable Units
- Quick take: If the government can miraculously create affordable housing projects that fund themselves, they should do it full-steam ahead. Barring that, if this is another government-sponsored social housing program that re-distributes income from already overtaxed Canadian families, let’s pass. C'mon NDPers. Think outside the box and incentivize private-sector housing solutions that don't end after 500,000 units.
Green Party leader Elizabeth May hasn’t revealed much in the way of middle-class mortgage/housing policy. Here’s one idea she’s passionate about.
- Eliminate the first-time home buyer grant.
- Quick take: Cutting a complex and potentially costly program that basically transfers people’s tax dollars to first-time buyers shouldn’t be unpopular, except with the first-time buyers who would have taken the money.
Recognizing What Matters
The thing that will generate the most affordability is the thing that’s hardest to do: Create $200,000 to $400,000 middle-class housing within an easy commute of major employment centres.
The reason governments can't do that (more often) is because it involves coordinating multiple layers of government, is tricky cost-wise and takes lots of time.
But good things always take time. Building hyper-fast transport to whisk commuters from low-cost housing regions to major employment centres takes time. Removing layers of bureaucracy from local and provincial building regulations takes time. Changing zoning to permit greater housing density takes time. Appropriating (and expropriating) insufficiently utilized land near transit hubs takes time.
But if Ottawa doesn’t herd the cats and start now, that time will never pass. And with immigration floodgates wide open, the laws of supply and demand still govern our home prices. Dictating new mortgage and tax policies is the easy way out. Such demand-side housing proposals are like taking antacid for a peptic ulcer. They make the symptoms go away for a while, but the patient never gets better.