Expand the Bank of Canada mandate, for starters
Canada is facing a housing crisis that is threatening to keep a whole generation of Canadians from owning a home. The question is, what is the federal government doing to help? Are there solutions to the struggles of many would-be buyers? Here are six suggestions that might work.
Restrict availability of credit
This is a single policy lever that the government of Canada can pull that would profoundly impact housing affordability. Since the 1970s, the federal government essentially stopped intervening in the credit market, effectively allowing the private sector to make the decisions. That move, some argue, has only led to a housing bubble.
To combat the housing crisis, the government could begin by restricting housing costs to four times household income with the intention to eventually bring it down to three times household income. (Currently, average housing costs are at roughly six times household income.) For instance, if you and your partner earn $100,000 per year, you could only borrow up to $300,000 for a mortgage at a three-to-one restriction and up to $400,000 at a restriction of four-to-one.
Try to expand the Bank of Canada mandate
Cheap money is responsible, at least in part, for driving home prices sky high. From 2009 onward, the Bank of Canada kept its crucial overnight interest rate below 2%—an historical low. With a policy rate of 0.25% until recently, interest rates on a five-year variable mortgage were as low as 1.25%. That was incentive enough for most Canadians to purchase properties and greatly increase costs.
The Bank of Canada kept interest rates low to stimulate the economy after a recession in 2009. In recent years, the central bank lowered interest rates to navigate the financial implications of the COVID-19 pandemic. Because its primary focus is to keep inflation low and stable, the Bank’s potential impact on real estate prices—as a result of its own monetary policy—is unpredictable. This means that, essentially, the central bank has no incentive to act if a housing bubble does form so long as the overall inflation rate remains at 2%.
Protect existing affordable rental stock from ‘financialization’
Encouraging new supply is not the only housing policy change needed to positively influence the rental market. The federal government also needs to steer Canada’s existing rental supply.
Institutional players are buying older, purpose-built rental stock—most of it built with government incentives in the 1970s and 1980s. These are then being turned into higher-income rentals, which displace quite a few people. For example, due to that financialization, more than 300,000 of those affordable homes were lost between 2011-2016 in British Columbia alone.
Since the current arrangement prioritizes institutional investors—and rewards them—the federal government needs to review the tax structure. In other words, the feds could aid co-op and non-profit sectors in buying those properties, which would then remain affordable in perpetuity.
Address the surge of international students
Because Canada is experiencing major enrolment spikes from international students, many end up buying or especially renting family homes, thereby reducing the overall supply. The impact of this has been seen in east London, Ontario, where the international enrolment at Fanshawe College has risen by roughly 6,000 over the last five years, which is likely to have profoundly impacted housing in that part of the community.
The federal government could therefore collaborate with post-secondary institutions to build more apartments and residences specifically for students. That would help alleviate some of the pressure from the local housing markets.
Tax exemption on REITs
A REIT is a Real Estate Investment Trust. They were first introduced in the United States in the 1960s to give small investors a chance to invest in income-gathering assets. In other words, they were a way to democratize the real estate market.
Canadian REITs have grown in popularity due to a preferred tax treatment, the reason being that you may get a full corporate tax exemption if 90% (or more) of an REIT’s income is distributed to investors. (It should be noted that in this scenario investors would still be required to pay some of the taxes on the distributions.)
However, housing affordability is being negatively affected by residential REITs, which account for at least 10% of Canada’s multi-family housing stock. Usually, REITs attempt to get more income when adding new multi-family buildings to their portfolios by investing in upgrades and renovations. That way, rents can be significantly raised.
The Canadian government has proposed an anti-flipping tax for one year, meaning anyone who sells the home they have owned for under 12 months could be subject to full taxation on their profits as business income. Some argue, however, that the one-year period is not long enough since stopping speculative behaviour in the real estate market and encouraging longer-term investments would require a much longer period of anti-flipping taxation.