"Finding an affordable place to call home is not just a challenge. For too many hard-working Canadians, especially for young people, it feels like an impossibility," Finance Minister Bill Morneau acknowledged in his 2019 budget speech.
He's got that right.
"... Young people are being squeezed harder than any other generation when it comes to housing. Average home prices today are about eight times larger than the average full-time incomes for Canadians aged 25-34, compared to when they were about four times larger a few decades ago," continues a special "Investing in Young Canadians" budget supplement. 👈 Which we asked for, and got.
So, how far does the federal budget go to help making housing affordable?
For the short story: check out our Op-Ed in the Globe and Mail.
For the full story, keep reading.
The budget included several new housing affordability measures, which we'll get to in a minute. But first, some context.
Context: the National Housing Strategy
This government's biggest move on housing to date has been its multi-year development of Canada's first-ever National Housing Strategy.
The NHS is pretty great 💪, but it's currently a social housing strategy at heart. It prioritizes — appropriately — the most vulnerable Canadians.
Gen Squeeze succeeded in getting young Canadians listed as a vulnerable group in the NHS. So that's good. But we believe what's needed is essentially a NHS Part Deux that focuses more on the broad swath of middle income Canadians who are struggling with housing affordability.
The language and housing measures announced in the 2019 federal budget signal moves in that direction, but the moves are early and not yet coordinated by an expanded strategy.
Hint to all federal parties: we recommend you commit to an expanded NHS in your election platforms.
A comprehensive plan?
"The Government is committed to a comprehensive plan supporting housing affordability," states the budget.
Fortunately, Gen Squeeze has developed our own comprehensive framework to restore housing affordability forever, so even without a formally expanded NHS, we can see to what extent this budget ticks the boxes.
Does it set the right goal?
In life and in public policy it's important to set inspiring, clear goals.
Like the semi-independent Canada Mortgage and Housing Corporation recently did when they announced an aspirational goal that:
By 2030, everyone in Canada has a home that they can afford and that meets their needs.
That's the right goal. It takes into account each of the estimated 1.7 million Canadians — including many young, middle-income Canadians — who spend more than 30% of their pre-tax income on housing (and as such are defined as being in core housing need). In other words, it aims to completely recouple housing costs with Canadians' incomes.
Budget 2019 does not adopt this goal.
Instead, it talks generally about improving housing affordability, estimates the impact of its new policies (e.g. helping 100,000 people get into the housing market), and then falls back on referring repeatedly to the NHS.
For reference, the specific goals of the NHS are to remove 530,000 families from housing need and to cut chronic homelessness by 50%.
In other words, CMHC is publicly aiming to help ~1.2 million more people than the NHS and by association, budget 2019.
Hint to all federal parties: follow the lead of CMHC and adopt their better, more inclusive goal in your election platforms. You can then directly aim to help more than a million additional voters.
Does it makes things worse?
If we want to ensure that by 2030 every Canadian has a home that they can afford and that meets their needs, then we can't be implementing policies that encourage home prices to go up even more!
Sometimes, governments do just that: like when former B.C. Premier Christy Clark announced a program of downpayment loans to first-time homebuyers. That program was roundly criticized as helping people take on more debt than they should, and encouraging prices to go higher.
Fortunately, the federal government bravely resisted lobbying by the real estate industry and others to relax mortgage stress tests and/or allow for longer amortizations, which would have been similarly worrying.
CMHC estimates that tightened stress tests have reduced the equilibrium house prices across Canada by about 3% and in Vancouver by about 8% from what they otherwise would have been. So undoing this work would not have been a good idea.
The fact that budget 2019 is holding the line on things like the stress test implies a willingness to hold the line on home prices, overall, and to tolerate recent small dips.
One potential wrinkle is created by the highest-profile new housing measure in budget 2019: a new, zero-interest loan/shared equity program being made available to qualifying first-time homebuyers.
At first glance, it looks like just another way to induce young people to purchase homes that are otherwise out of reach.
However, a closer look reveals a great deal of care has been taken with this one. As UBC's Tom Davidoff puts it: “This is subtracting risk from the mortgage market [where Clark's program] was adding risk to the mortgage market.”
There is interesting potential for this shared equity program to move CMHC into a novel position of building public equity in the private housing market, while also providing what one commentator suggests is essentially “a surgical intervention to address the bluntness of [earlier tightening of the mortgage] stress test."
For example, the maximum value of qualifying homes will be in the $500,000 range, limiting its application — and potential inflationary impact — in the most overheated markets. For more discussion read this piece in The Tyee.
Hint to all federal parties: if you want to help young Canadians cope with high housing costs, don't just make it easier for us to take on more debt than we probably should (and in so doing push prices even higher). Focus on reining in costs.
Does it adopt a guiding principle of Homes First?
There's a fundamental tension in the housing system between the use of housing simply as a place to call home, and the use of housing as a way for homeowners to make money: that is, to treat housing as an investment.
In the words of CMHC CEO Evan Siddall: "We’re investing in homes instead of new jobs and export-led growth... Residential real estate is mining our economic future in Canada.”
This is the biggest trap politicians find themselves in when they create housing policy.
Gen Squeeze maintains you can't improve housing affordability for the vast majority while simultaneously encouraging people to hope and expect their home values to increase faster than inflation/local earnings.
That's why we've been working for years to encourage politicians to clearly adopt a guiding principle of Homes First.
The City of Vancouver has done so, first through repeated statements by former Mayor Gregor Robertson, and then in its Housing Vancouver Strategy.
The B.C. government has also used similar language in recent throne speeches and other materials.
The federal budget does not clearly state a principle of Homes First or otherwise address this basic tension, and this is a major weakness.
Hint to federal parties: if you want to get serious about improving affordability, you must speak to and address this fundamental tension in the housing system. A good way to do that is to set a guiding principle like Homes First.
Does it dial up the right kind of supply?
Budget 2019 clearly aims to "increase the supply of housing, because it is the most effective way to address affordability in the long run."
Towards this end the budget included:
One concrete measure to provide more government loans to rental housing developers, quadrupling a previous target of incentivizing ~10,000 new rental homes to ~ 40,000 new homes over the next nine years. To put that in perspective, the rental housing target just for the City of Vancouver is 46,800 over the same period.
The strength of this program is in its relatively tight criteria, which helps ensure better housing and better outcomes, but its major weakness is its limited scale. A much bigger incentive would have been a GST rebate on all new rental housing, to help rental projects compete with condos, a measure the industry has been asking for. There's a lot more we could say to help compare the two approaches, but we'll leave it at that for now.
One vagueish measure to incentivize new supply by allowing qualifying first-time homebuyers to get 10% of the cost of a new home covered by the government's new zero-interest mortgage/shared-equity program (compared to 5% for existing homes).
And then a bit of a shrug ¯\_(ツ)_/¯ on what else to do, opting to establish a $300 million "Housing Supply Challenge" to brainstorm about how to remove barriers to new supply, and a new expert panel and data project with B.C. to come up with ideas. Fair enough. It makes sense to firm up thinking about the most effective role of federal policy, here. Gen Squeeze will seek to participate in both of these initiatives.
Hint to all federal parties: one of our current top ideas is to find a fair, transparent way to tie federal funding on infrastructure to municipal progress on housing targets, rewarding communities who find a way to get more quality homes built.
Does it dial down harmful demand?
The budget also proposes to crack down on tax evasion and money laundering, two ongoing sources of harmful demand in the market.
Specifically, we can expect:
- More auditors
- Better monitoring
- A custom partnership with B.C. — whose government is leading the way on this file — to get better data and share it more effectively
This is good. But it's important to remember that the federal government was asleep at the switch on this file for more than twenty years, even after being warned.
In the words of B.C. Attorney General David Eby: "It felt like for a long time that we were shouting into a canyon and finally we’ve heard something back instead of an echo, which is great.”
It's too bad the government of Ontario doesn't seem equally committed to partnering with the federal government on this file, given reports of rampant 'dirty money' in Toronto's housing market.
Unfortunately, the 2019 budget falls completely flat in acknowledging or addressing the broader impact of [legally-held, non-tax-avoiding] non-resident ownership of Canadian homes, or in the words of Simon Fraser University's Andy Yan "the globalization of Canadian residential real estate."
For example, examining newly-improved data from CMHC, Yan concludes that "non-residents have participated in the ownership of a shocking 14 per cent of all housing types built in the city of Vancouver in the past decade."
British Columbia has done the most to tamp down — if belatedly — the impact of global capital on local housing markets, followed by Ontario under former Premier Kathleen Wynne.
Fortunately (perhaps at B.C.'s urging?) the new joint BC-Federal "Expert Panel on the Future of Housing Supply and Affordability" also has a supplementary mandate to "identify additional measures that could be undertaken to deter unwarranted demand."
But the scope of that supplementary mandate is not clear.
Hint to all federal parties: increasing supply is critical to restoring affordability, especially over the long-term. But your housing affordability plan will not be comprehensive nor widely credible if it does not acknowledge and address the immediate impact of multiple sources of harmful demand, including from domestic speculators and investors, and foreign money/non-resident ownership.
Does it rebalance our tax system to address inequalities?
In the words of CMHC CEO Evan Siddall, “housing is driving a gap between rich and poor and we know it."
As housing values have spiralled out of control, huge new inequalities have been created between renters and owners, and young and old. Our tax system has yet to catch up, which exacerbates housing costs and burdens many of us more than is fair.
That's why Gen Squeeze has been advocating for a #TaxShift: less tax on local incomes, more tax on speculation and unhealthy housing values, and better investments in young and old alike.
B.C. has made the most strides here with its new Speculation and Vacancy Tax, the expanded foreign buyer tax, and increased taxes on homes worth more than $3 million.
Back in 2017, former Ontario Finance Minister Charles Sousa wrote a letter to federal Finance Minister Bill Morneau asking for a similar move: specifically, changes to the taxation of capital gains on the sale of homes that weren't a primary residence.
As reported by the CBC, "Sousa had wanted an increase as a way to address speculative investors flipping homes in hot housing markets like Toronto and help make it easier for first-time homebuyers."
Morneau didn't touch capital gains then. And they remain untouched in budget 2019.
This reflects a continuing unwillingness, in budget 2019 and elsewhere, to tackle the harmful consequences of decades of policy that encourages the accumulation of wealth in the form of housing, which is in direct tension with aims to improve affordability.
Illustratively, the current National Housing Strategy doesn't mention the word "wealth" once.
Hint to federal parties: if you adopt CMHC's goal to restore affordability for everyone by 2030, and especially if you're concerned about social inclusion and reducing wealth inequality, you need to use policy (e.g. tax policy) to encourage people to invest their money in productive assets, instead of speculatively parking it in housing.
Does it scale up the permanently affordable market?
The current National Housing Strategy focuses heavily on shoring up and scaling up the non-profit housing sector in Canada.
And a good portion of the newly expanded Rental Construction Financing program will likely flow into non-profit housing, as well.
There's a great deal of variability in the exact degree of "permanence" and "affordability" in the non-profit housing stock that is/will be supported by the NHS, but it's generally going to be better than what you'll find in the private market.
So this is an area of strength in budget 2019!
One of the challenges of scaling up the permanently affordable market is that it is expensive, sometimes risky, and takes a lot of time to develop new housing.
That's why Gen Squeeze is currently fundraising for a project that seeks to figure out how to empower and incentivize individual homeowners to voluntarily add their existing homes/land to a permanently affordable stock. More on that at a later date.
Hint to federal parties: the NHS is pretty great on this front. So even as you contemplate expanding its scope to include more Canadians, don't mess too much with this part, except by increasing its funding if there's evidence that the sector can effectively absorb it.
Housing market hacks
The framework outlined in the discussion above — i.e. setting the right goals and guiding principles, dialing up supply, dialing down harmful demand, rebalancing our tax system, and scaling up the permanently affordable market — charts a path to reining in housing costs.
But because there is a fundamental tension in the system between advancing affordability and protecting home values, governments will often look for ways to simply subsidize or otherwise help people cope with existing prices, as unhealthy as those prices might be.
Budget 2019 includes a couple of these hacks:
- The first is that new zero-interest loan/shared-equity program
- The second is increasing the Home Buyers’ Plan withdrawal limit from $25,000 to $35,000, allowing first-time home buyers to borrow more money from their own RRSPs in order to buy a home (for those who actually have $35K in RRSPs).
The shared-equity program is a particularly innovative hack, in that it replaces a portion of private, for-profit financing with public financing and equity, and will help as many as 100,000 people save a good amount of money each month on their mortgage payments.
But full details won't be available until September. And it bears repeating that to restore affordability for all Canadians, and to address inequalities created by runaway costs, we'll need to move beyond [even innovative] hacks and implement policy that reins in the purchase cost of homes and land across the board.
The housing measures in the 2019 federal budget plan show some promise, but more work is required to help the many Canadians – especially young people – who find themselves in a financial squeeze when trying to buy a home.
As federal parties craft their 2019 election platforms, we'll be looking for them to:
- Follow the lead of CMHC by setting a housing affordability goal that includes all Canadians
- Create a new phase of the National Housing Strategy to serve that expanded goal
- Acknowledge and address the fundamental tension in the housing system, adopting a guiding principle of Homes First
- Do more to incentivize a diversity of new supply, building on the outcomes of the new Housing Supply Challenge and expert panel
- Double down on commitments to aggressively crack down on housing tax cheats and money laundering (a source of harmful demand)
- Do more to restrict the globalization of Canadian residential real estate, generally (a broader source of harmful demand)
Implement a #TaxShift to address inequalities created by runaway housing markets: less tax on things we want more of (like income). More tax on things we want less of (harmfully high housing prices, pollution, etc.)
- Build on the good work of the National Housing Strategy in shoring up and scaling up more permanently affordable housing for the most vulnerable Canadians
- Don't rely solely on housing market hacks. Address the root problems (see everything above)
We'll be releasing our specific policy recommendations for federal parties this April.