Is this a housing election?
Housing affordability has become a central issue in the 2021 federal election, with Liberal, Conservative and NDP party platforms echoing Gen Squeeze in affirming that the situation has reached crisis proportions. The Green platform is still not out.
It’s great to see the parties upping their game when it comes to housing policy. All recognize that we have a dire problem. All appear to know that there is no “silver bullet” policy that will save the day. And all instead are proposing something more akin to “silver buckshot” by recommending changes to a variety of policy levers. This is promising.
With so many commitments on housing, we need more than a single blog to provide you with a fair and comprehensive review. The Gen Squeeze Voter’s Guide – which we will release once the parties add costings to their platforms – will analyze all of the details. So stay tuned by signing up to our email list and following us on Instagram, Twitter, and Facebook.
For now, six things stand out.
1. There is increasing convergence between the big three parties
This shows that evidence is increasingly shaping policy thinking in the world of politics, regardless of ideological differences. Of course, important differences remain, but there is a trend towards alignment, which is good.
2. All three platforms share a common problem
They are silent about what needs to happen to housing prices over the next decade. We can’t restore affordability for all if home prices don’t stall so that local earnings have a chance to catch up. We need parties to be explicit about this reality, because it has huge implications for how we shape policy to influence home prices, and how we aim to grow our economy more generally.
The figure below reveals that average home prices have skyrocketed out of reach from local earnings over the last five decades, and especially since 2000. When Baby Boomers came of age as young adults around 1976, it took the typical young person 5 years of full-time work to save a 20% down payment on an average home in Canada. Now, it takes 14 years. In Ontario, it’s 18 years; 20 in BC; 24 years in the Greater Toronto Area and 28 in Metro Vancouver. When home prices rise faster than earnings, much more work is required of those trying to get a start in the housing market – pushing home ownership out of reach for many, or weighing people down with heavy, heavy mortgages.
As home ownership moves out of reach for more and more people, the consolation prize is rising rents for many more people who seek homes from a limited supply of rental and co-op housing. The influence of ownership costs on rents is complex, and not necessarily linear. But the ability to scale up rental and co-op housing is directly influenced by the cost of land, which is the primary driver of rising housing prices. As land values rise, the ability to develop rental and co-op housing at scale also becomes much more challenging.
Without a commitment to stalling home prices, other policy interventions proposed by the parties in this election are likely to prove insufficient to restore affordability for all. Imagine an escalator going up… fast – just like rising home prices. There is no doubt that party leaders are proposing their governments would run faster than ever before to try to get down the escalator to support affordability. But even this faster pace won’t be good enough if the speed of the escalator (aka home prices) grows faster than they can run. We need to stall that escalator!
3. The three parties appear to be courting younger votes
This is a good thing, because the housing system has been harming younger generations for years now – as Gen Squeeze has repeatedly highlighted in our evidence based policy work. In fact, the Liberal party platform directly quotes a common Gen Squeeze refrain: “the deck… is stacked against young Canadians.” This language is important, because it acknowledges that it is the housing system that is broken for younger residents. Housing is unaffordable not because we drink too many lattes or eat too many pieces of avocado toast, but because the market continues to tolerate skyrocketing home prices that leave local earnings in the dust, squeezing more and more wealth out of the system for existing owners, and eroding affordability for those who follow.
To help young individuals bridge the massive gap between local earnings and average home prices, the NDP and the Conservatives promise to make it easier for people to borrow more money. The NDP promise to return 30-year mortgage amortization periods. The Conservatives talk about 7 to 10-year mortgages, and easing the stress test, which requires potential buyers to qualify at higher interest rates that are currently on offer by the banks to prevent them from falling behind in their payments if/when interest rates rise.
While helping individuals borrow more may somewhat mitigate their personal affordability barriers, this approach risks breaking the housing system even further for those who follow. When people can access cheaper credit, they increase their bids for housing. And when they bid up housing…. they contribute to propelling the average price of housing still further beyond what locals earn.
Liberal platform commitments align better with evidence on how to avoid further igniting home prices – with one caveat. The Liberals generally aren’t aiming to help younger Canadians borrow more; but they do want to support younger Canadians to SAVE more, faster. Younger Canadians are promised a special savings account that will combine the best of RRSPs and Tax-Free Savings Accounts. You can save up to 40,000 in the account, and deduct this savings from your earnings – which saves you income tax payments. Then any investments returns to that $40,000 will also be sheltered from future income taxation. Tax free in. Tax free out. That’s an interesting initiative designed to help younger folks save for home ownership, without encouraging further borrowing.
The Liberal platform also aims to reduce the cost of insuring a mortgage. For those with the good fortune to save a large enough down payment, the cost of buying mortgage insurance from the Canada Mortgage and Housing Corporation will be reduced by 25% for first-time home-buyers, yielding estimated savings of over $6,000. It’s certainly not a game changer, but it delivers considerably more savings than the first-time home buyers’ tax credit that is currently on the books. (And, which, the NDP and Liberals promise to increase again this election. Their promises may sound like they will generate big savings for home buyers, but actually deliver only up to $1,500).
The caveat to Liberal promises to help younger Canadians save more, not borrow more relates to a promise it is making about mortgage insurance. Presently, Canadians can insure a mortgage with CMHC up to a $1 million. Now the Liberals propose to increase the maximum to $1.25 million. So, while the Liberals are working hard to support younger Canadians get into home ownership without borrowing more, they are also making it possible to insure larger mortgages more generally. There appears to be an inconsistency here in the Liberal logic.
4. The three parties propose incentives for rental supply
...and NDP and Liberal platforms include protections for renters. Protecting rental options is growing in importance as home ownership moves out of reach for many younger Canadians, newcomers of any age, and the 20% of seniors who are renters. The NDP promise to incentivize construction of new purpose-built rental housing by removing the GST from development costs. This has actually been promised by the Liberals in past elections, but they ultimately went with their Rental Construction Financing Initiative – citing concern about how to ensure the GST tax cut would result in the construction of rental units with a price tag in reach of what many can afford. The NDP don’t indicate how they would overcome this concern; but their promise is definitely one that will spur the construction of more rental generally.
The Conservatives offer an interesting variation on this theme, by promising to encourage Canadians to invest in rental housing by extending the ability to defer capital gains tax when selling a rental property and reinvesting in rental housing. I must confess that this is a policy idea I that I have to investigate further, because I haven’t considered it before. What I can say now is that tax incentives can be used to spur the construction of more rental housing, and increases in supply should help to dampen rents. But concerns linger about whether blunt tax breaks can deliver new supply that is affordable for most renters.
The NDP also refers in general terms to delivering “immediate relief for families that are struggling to afford rent in otherwise suitable housing, while we bring forward long-term solutions to the housing affordability crisis.” In the absence of more details, and a budget for this promise, it is unclear what level of support it will deliver, or how many homes it would help.
The Liberals promise two things that stand out for renters. First, to grow the number of “rent to own” options. The budget is $1 billion for this initiative, so its reach is modest when considered against housing needs at a population level. The Liberals also promise to dial up protections for renters to “stop renovictions” by deterring unfair rent increases. A comprehensive strategy to restore housing affordability for all absolutely needs to increase protections for renters who face renoviction, demoviction and vacancy control problems that can result in dramatic increases to rents when improvements are made to the existing stock of rental homes. Since a lot of the necessary regulations operate in provincial jurisdiction, more information is necessary to learn how meaningful a promise this is. What we can say now is that the intention is noble, and supported by evidence.
5. All three parties emphasize the need to grow the supply of affordable housing
The NDP promise 500,000 affordable homes, while the Conservatives promise 1,000,000 new homes, many of which they hope will be affordable. The Liberals promise 1,400,000 new or renovated units – again many of which they hope will be affordable. The NDP and Conservatives are relatively short on details about how they would get these new units built fast, and at a price point in reach for financially squeezed Canadians. The Liberals will rely heavily on a program they previously built – the National Housing Co-Investment Fund. Since this fund has already been criticized for being slow in delivering the funding to projects, questions remain about the implementation of the Liberal promise on the ground.
The level of ambition in all three commitments to increase housing supply across the country should be examined in light of data about housing need. By the middle of this decade, the independent Parliamentary Budget Officer anticipates that 1.8 million Canadian homes will be in core housing need (spending more than 30% of their income on housing). So even if all of the new homes promised by the NDP, Conservatives or Liberals come in as “affordable”, many Canadians will still struggle to access affordable housing.
6. All three parties aim to dial down some examples of harmful demand
Interestingly, the Conservatives and Liberals are boldly saying they will go beyond any of the measures adopted in Canada to date when it comes to restricting non-residents from purchasing homes. Both propose a two-year ban on foreign purchases of principal residences, followed by a careful study of the impact of this change. The NDP platform departs from this approach, sticking with a foreign buyers’ tax.
The Conservatives and Liberals deserve credit for promising a temporary moratorium on non-resident purchases. Reserving housing as a place to call home – not a way for global investors to get rich – is a next, logical step beyond the foreign buyers’ taxes that BC and Ontario have already implemented. While these foreign buyers’ taxes have contributed to dampening home prices – they have not been “game changers.” So it is reasonable to consider further restrictions on global capital in our domestic housing market in order to align with the Gen Squeeze principle of Homes First, Investments Second. If, as the Conservatives emphasize, we can redirect foreign investments to build new purpose-built rental (that does not displace existing affordable rentals), that would be a win-win.
Other examples of parties aiming to dial down harmful demand include all parties promising to reduce money laundering through real estate. There’s talk of making it harder for real estate agents to hide when they act for both the seller and buyer. The Liberals also promise to expand across Canada BC’s approach to discouraging vacant homes.
Most notably, the Liberals stand out positively for promising a plan to discourage home flipping by adding a new tax on people or companies who buy and sell homes within a 12-month period. This would be a welcome change, called for by many academic experts – including at Gen Squeeze – because it offers another policy signal to discourage treating housing primarily as an investment vehicle, which is making it harder for others to use housing for homes.
The punchline
It’s great three major parties have made housing affordability a top election issue, acknowledging a “crisis” because the housing system is “stacked against younger Canadians.” It’s also great that many of the important commitments being made are supported by the evidence. But amid all of these promises, the Liberals, Conservatives and NDP are dodging the key question: what do they plan for home prices going forward? Unless parties make explicit they aim to reorient all available policies to ensure that home prices stall, we won’t restore affordability for all, because wages won’t have a chance to catch up.