This is an area on which Gen Squeeze is focusing particular attention.

Unless Canadians’ incomes drastically increase, it will be extremely difficult to achieve and maintain the goal (everyone able to afford a home that meets their needs) in a context of high and rising home values.

The problem is that past and current policy has encouraged treating home and land ownership as an investment and retirement strategy, with many households now expecting or depending on home value increases for their financial security and wealth.

Canada’s overall economy is also problematically dependent on ever-rising home values and the additional consumer spending, GDP increases, and investment returns this creates.

Altogether, Canada has become addicted to an unsustainable housing system (a.k.a. housing bubble), and we need to figure out ways to break the addiction.

This can include policy that helps Canadians gain wealth outside of homeownership, rebalances taxation of income vs. real estate windfalls, and protects those households that would be made vulnerable if the bubble bursts/prices drop.

Policy Category 1: Rely Less on Real Estate to Drive Economic Growth

Real estate, rental and leasing represents the largest contributor to Canada’s Gross Domestic Product (GDP) at 14%. This industrial sector is bigger than manufacturing; bigger than mining, oil and gas; bigger than construction; bigger than health care; bigger than financial services; bigger than professional, scientific and technical services; and so on. Real estate has also grown as a share of GDP in all provinces over the last two decades, and often has been the fastest growing part of provincial economies.

Anchoring our economic growth on real estate would be a fine economic strategy – if Canada was also generating a large portion of its employment in this same industrial sector. But we don’t. Canadians find less than 2% of employment in the real estate sector. No other industrial sector has such a big gap between its share of GDP and its share of employment.

This is a problem. It signals that Canadians have been growing our economy by increasing the major cost of living, and without generating jobs in that industrial sector in numbers sufficient to ensure that local earnings keep pace, especially in urban centres. The 2% who find employment in real estate generally attract high incomes. Existing property owners, gain housing wealth, which will propel our spending and consumption, and drive up GDP. It’s one way to grow an economy – but it’s not a good way if we prioritize hard work paying off for younger people and newcomers to Canada. Paying off in terms of generating earnings that can cover their primary cost of living – housing.

Policy Category 2: Increase on Housing Wealth Windfalls, Lower Income Taxes

One reason Canada is addicted to high home values is the relatively low taxation of residential property wealth.

For example, while every dollar of labour income is taxed (subject to deductions), only 50% of capital gains on secondary residences are taxed, and capital gains on principal residences are tax-free.

Canadian jurisdictions also apply modest levels of annual property taxation by comparison with taxation on income and capital gains.

This kind of tax sheltering is easier to justify when home values track closer to inflation, but in the current context of runaway gains it serves to draw capital away from more productive economic activity, inflates demand and average costs, contributes to inequalities and unaffordability, and makes homeowners increasingly dependent on high and rising values.

To address this, Canadian governments can lower taxes on income and raise taxes on property wealth in a number of ways, ranging from higher annual property taxation to deferrable surtaxes or capital gains taxes, being mindful of trickle-down impacts on tenants.

Policy Category 3: Reduce Collateral Damage From the Cheap Credit System

Statistics Canada underestimates the contribution of rising home prices to inflation. The Bank of Canada uses this (inaccurate) inflation signal to guide decisions on interest rates – keeping them at historic low levels because inflation is reported to be modest. Low interest rates decrease the cost of taking on a larger mortgage. Buyers who are able to borrow more bid up home prices. Rising prices aren’t adequately captured by Statistics Canada in inflation data… and there’s your feedback loop, sustaining the cheap credit system and growing the gap between home prices and earnings.

Policy Category 4: Cushion the Impacts of a Price Drop

One of the biggest challenges with persistently overheated housing markets (a.k.a. bubbles) is that if the bubble bursts and prices go down, many households and the economy writ large would take a hit.

However, if we think home values need to drop in order to achieve affordability for everyone, then we need policies to protect people against the impacts.

This is a relatively uncharted area of policy and would benefit from a detailed mapping of risks, differentiating between those who would be disadvantaged by a drop in prices and those who would be made truly vulnerable.

Policies could range from debt relief or ownership takeovers/tenure transitions, to strengthened social programs that decrease Canadians’ current and future reliance on home equity to provide for basic needs.

Such policies would need to be carefully designed so as to not encourage even greater risk-taking.