Canada’s new housing minister has only been in office for a few days, and already stumbled. In a Bloomberg Interview, Minister Sean Fraser pledged to make housing more affordable without lowering prices. He reiterated the housing-is-an-investment mindset, before dropping suggestions that would reinforce higher prices. Great news for investors. Not fantastic if you pay taxes, or you need affordable housing.
“Our goal is not to decrease the value of their home,” MP Fraser told Bloomberg. “Our goal is to build more units that are at a price that other people, who don’t currently have their needs met, can afford.”
Details on how he would lower and not lower home prices at the same time were scarce. However, he did mention he would increase supply, incentives, and development speed. It’s a narrative repeated since 2015, and made Canada the affordable market it is today.
Kidding! It’s nonsense, so let’s take a dive into how these strategies work.
Canada Wants To Boost Supply, Which Boosts The Cost of Building Homes
Minister Fraser has a solution so simple and effective, it’s remarkable no one thought of it before. “The solution is to build more houses,” he explained to Bloomberg.
Genius. There’s just one problem—building more homes means more demand on labor and materials. Canada is working on the labor demand problem with inbound colonialism an aggressive immigration policy. Sure, immigrants feel misled and exploited since the state needs them for cheap labor, and most of their salary goes to housing. But, to give policymakers credit where it’s due, the plan solves the cheap labor issue, and convinces most Canadians it’s a social service.
Fun fact: The new housing minister served as the immigration minister immediately before he was appointed to this role.
Building materials & land won’t be as easy, since commodity markets are harder to exploit. It’s easy to say, “let’s double the houses we build!” Now try to double the sourcing of lumber, steel, silica, copper, etc.. It’s not as easy in a global market.
Commodity competition is at a global level. Building more is fine in theory, but other regions and sectors need those materials too. A building in Toronto requires competing with New York, Taipei, or Auckland for the same commodities. Canada can win that fight, but it won’t be cheaper.
The increase won’t just increase the input costs directly, but it has a knock on effect. Since other countries need those materials too, it creates a bidding war. It turns out supply and demand doesn’t just apply to the finished product, but all of the components as well.
Heck, there’s so much building that BC and Ontario have cement shortages. Canada thinks it’s unique here, with policymakers once again blaming labor. In reality, a global shortage of appropriate sand has materialized. What’s left is typically environmentally destructive and/or allegedly controlled by the mafia.
But you’ll just double the amount needed, thus making housing cheaper, right? That’s pretty cool math.
Worth noting that even BMO thinks Canada’s ability to double its housing output isn’t realistic.
Canada’s Trying To Dig Up To Get Out of A Hole
Okay, you got the material. Now there’s still a land problem, and we just need to add more units, since building 40-60 stories high fits more houses on the same land. That’s gotta be cheaper, right?
Let’s look at building costs for Greater Toronto, where building low rise must be sooo expensive. Well, not exactly. Altus Group estimates a 40-60 story tower can be double the cost per square foot of a wood-framed townhome. In other words, the builder cost for a 1,000 sq ft townhome is the same as a 500 sq ft apartment. That effectively maintains the same cost, cutting the size in half. At the same time, existing units that were 1,000 sqft get a price boost, since they’re more roomy. Nailing this.
But land prices are shared, so it’s cheaper. Right? That’s not totally clear, since zoning is a real estate price fundamental. Land zoned for a 60-story tower is worth a 60-story tower, less the cost of building it. If you owned the land, would you take a $260 million loss?
Ever read a story where a mom & pop restaurant is getting hit with an exorbitant tax bill? It’s usually because a policymaker decided that’s where a tower should be. Consequently, a small restaurant ends up paying the taxes of a 12-story tower. Ironically, it’s usually the same cities denying applications in other regions.
Eviction by re-zoning is also a great tool for supervillains. Just buy a politician in the region where you’ve begun to assemble land, and have them up-zone the pesky mom & pop shops. It’s a problem that goes back to the 90s, used (allegedly) by organized crime. However, that’s a piece for another day.
Subsidies Will Result In Taxpayers Funding Investors
Subsidies, subsidies, subsidies. The minister suggested we “add more supply through incentives.” Incentives aren’t a firm handshake, and picture on the “Developer of the Month” wall in his office. These come in the form of tax breaks or government subsidies, both of which are taxpayer costs. At the Federal level, that means taxpayers across the country carry that cost.
Is it fair for a small business in Sarnia to help pay a subsidy for Toronto’s real estate bubble? How about a Vancouver home, sold to investors abroad? Genius plan for investors. Not so sure it’s great for taxpayers.
More so, it doesn’t necessarily reduce the cost of a home since developers don’t set prices, the market does. Giving them a discount doesn’t remove the investor who is trying to make a profit between being your Member of Parliament. Considering that investors are the majority buyer in most of Canada’s markets, they’re more likely to capture this incentive than a first-time buyer.
Building Homes Faster & Cutting Red Tape
The Federal minister suggested something that might work—helping to speed up development. Double the emphasis on might. “We need to be creating policies that will incentivize developers to build more quickly and incentivize communities to pull the barriers down to allow developers to build more quickly,” Fraser said.
A lot less catchy than Pierre Poiliviere’s “cut red tape,” but it’s effectively the same policy being adopted. The first part, speeding up development, reduces input costs, for sure. Builders have to carry significant costs while they’re delayed, and those costs are passed onto consumers for as long as they can absorb them.
As long as they aren’t speeding up costs with broad upzoning pre-approvals, since that whole zoning-fundamental-thing where input costs rise, thus making housing more expensive.
The problem here is once again that developers only control their pricing floor. They can stop building if prices fall to the point it’s no longer an incentive. They don’t control the market price of a new home, which is set by the marginal buyer. The maximum a marginal buyer is able and willing to pay is often set by the amount they can finance.
A deputy governor at the Bank of Canada (BoC) made a little-heard industry presentation before retiring. In it, he explained that the common mentality is that falling interest rates would improve affordability and the economy, since consumers will pay less interest. In reality, home prices increased over the past 30 years to absorb whatever people could finance. It effectively led to no affordability improvements.
Funny story, right? Anyway, the point is that even if the input costs fall, that doesn’t translate into how much someone is willing to pay—the amount they can finance does. If the marginal buyer is an investor, they’re still likely to outbid the first-time buyer with a subsidy.
Tragically, the only way to make housing more affordable is by lowering the incentive to make it an investment. That means it can’t be both the most important investment a person can make, and a sustainable solution for shelter. If it’s the former, the role of an investor is to capture as much profit as possible, knowing an end-user will overextend themselves. One person’s home is another person’s rental dividend.
Stimulated market inefficiencies lead to long-term fall out that results in market corrections. It’s hard to persistently speculate on a necessity such as housing, and the longer the period, the sharper the correction. We’ve seen strong examples of this in Canada in the early 90s, the US in 2008, China in the 1950s, and France in 1789. Ideally, it’s the early 90s-type.
Disappointed to see “quantum affordability: prices will stay the same and fall” used in the newsletter but not in the article, though it’s a reminder of why I subscribe. Keep up the good work!
How many homes does he own?
I’m sure that this political speak means that they want to keep prices flat while incomes slowly increase. How many years will it take?? I bet these authors have already done a similar analysis.
As for added incentives like the FHSA. They have such a small relative impact that it won’t make a difference.
This new minister needs big new ideas or nothing will change.
It took over 30 years for Japans RE bubble to reach where it started to crash. We’re in uncharted territory in Canada.
You’re giving them way too much credit. All it means is we will endeavour to make everyone happy, but some (big landowners) will be happier than others.
If Canada reduced the incentive to own investment properties (e.g. by hiking the property tax and eliminating deductions for repairs/improvementsl) and disallowed the purchase of properties by companies and foreigners, the number of available homes for individual residents would increase, thereby decreasing values and increasing affordability.
Please continue the great work you’re doing pressing the government on these issues and educating Canadians. This is critically important right now.
To dissect means to kill, the story can be further discussed but should not be distorted.
We need a federal housing tax on the third piece of residential property that anyone (and their spouse and corporations they hold shares in) own and up.
I’d say second property, but that won’t fly politically (cottages).
Make it too costly to hold, at least compared to other investments.
Yes! Tax second (and beyond) home ownership income until its revenue neutral. That would remove the rental profit from ownership beyond your primary residence. That way people can keep the cottage, but just stop profiting off those who happen to have to rent. Would free up lots of homes for primary residences, once it no longer looks like a good cash flow investment.
Good idea. Canada could discourage speculators & flippers with tax policy, instead of encouraging speculators & flippers with tax policy.
I am happy he will be protecting homeowners hard-earned equity.
You didn’t earn (‘hardly’, or otherwise) a doubling of prices since 2015. That was gifted to you through deliberate government intervention with zero effort on your part.
Lol it doesn’t matter what equity remains when no one is willing to pay.
Actually homeowners, which I am one and I also own a recreational property, have no hard earned equity. I worked in finance for decades and that was hard earned as many jobs are. My real estate increased very slowly and at less than the rate of inflation and losing value at times too when factoring in operational costs. Starting about 2016 when the current government super charged buying through a bunch of uncontrolled inputs such as interest rates, amortization periods, down payments, … Real estate prices irrationally increased at uncontrolled rates. So, owners have seen unearned capital gains in their home value. NOT HARD EARNED, that comment is laughable. For homes, investors have to be evicted from the market as someone has suggested. To lessen demand which will be a drag on homeowners unearned capital gain.
Hard earned! Haaa, what hard work have home owners done with regards to building equity…
This guy’s talking out of rear end, he can’t do crap and he knows it. The majority can’t afford the homes they’re and just a matter of time. Tick tock
bingo….tick, tick, tick….POP…..its coming….governments can’t do a thing to prevent this….bring it on….he is just foaming at the mouth again
OMG this article goes hard.
Cook ‘em all 5/5
““Our goal is not to decrease the value of their home,” Housing Minister Sean Fraser said in his first interview with Bloomberg News since he took the job on July 26. “Our goal is to build more units that are at a price that other people, who don’t currently have their needs met, can afford.””
I have just got up and got a plan to make omelette without breaking an egg.
This is basically what this new minister is saying. God save us with this sort of people getting up there. It is considered imperative that to drive cars or fly planes people need to learn, but when it comes to running state it looks like everybody can do it.
“With lower home sales volumes, high borrowing costs for construction financing, and high construction costs for materials and labor due to inflation, housing developers and builders are increasingly seeing pressures with the financial viability of their projects” There’s the rub, isn’t it? Under the current environment, builders are seeing too much risk so they are slowing down investment in new builds. It’s just how the market functions, lower home prices will lead to fewer builds until the builders feel it’s safe to take on the risk. We are seeing this too in new construction numbers for condos which have declined, this sector had another whammy through its way, the removal of the small investor who is needed to get some of these off the ground in the first place.
Very informative article. Sorry you’re not on Twitter anymore 🙁
Here we go again, another politician supporting house prices to keep everyone rich. Well, of course not us poor fools who didn’t buy a decade ago – no one cares that we’re left out.
I’d like to think that one day housing here will fall, as it so needs to, but too many vested interests for that to ever happen.
Canadians, demand that your politicians #lethomepricesfall ! Otherwise, we’re #leavingCanada-tooexpensive !
Spread the word – if politicians see both Canadians and immigrants leaving Canada due to the high cost of living, they might see the true cost of these idiot policies.
Basic economics stipulates that if demand is high and supply is short, prices increases. Naturally if supply is increased the cost goes down. It’s the same for all the building materials. Increase the supply, wages are already depressed so that won’t be an issue either. That or stop letting in more people.
A few points to remember that the Federal government seems to omit.
Immigrants don’t build homes-skilled trades do. That is a post-graduate level of commitment to become a journeyman electrician, plumber or other trades required by our building codes for home construction and we have a vast skilled trades shortage.
Secondly, we are adding over 1.4 million new Canadian residents each year. That is made up of new immigrants, refugees, temporary foreign workers and international students. They all need housing and none have the skills to undertake anything more that manual labor due to the skilled trades shortage and Canadian building codes.
The idea that we need the high level of immigration to build more homes is simply gormless.
Thank you for your analysis.
One day people will read your articles and ask “How come these guys saw it coming and others did not?”
Regards,
“In bound colonialism” is an apt description of Canada’s immigration policy. I will cherish it under my pillow.
Without having infrastructure in place, ie: Building the City on The Hill So They Will Come… Immigration syphons off talent 2nd and 3rd world countries need to develop. The host Country promises much and delivers jobs like Uber, SkipTheDishes and McDonald’s.
You know what would lower prices? A tax on buyers of buildings with less than 5 units for owners of 2 or more other properties in Canada (and all corporations of course).
But that wouldn’t help the parasitic housing “investors”.
So who exactly will house Canadians if the “parasitic” investors are beaten down? Not everyone wants to buy a home.
Toronto’s crazy commercial realty taxes are hurting everyone. Also how about new construction methods to build housing. Its so inefficient right now. Why are all new condos tiny with luxury finishes. They should be large so families can live in them,with basic finishes that can be updated over time as people wish. Like the old starter homes after WW2
I find it odd that it seems that the federal approach to the (market housing) affordability crisis is to simply build more / increase supply.
If we take the argument to its logical conclusion, then we have to ask: how much housing, of what type, needs to be built and where, in order for current prices to not only level off, but to actually decline back down to the realm of median (income) affordability?
Based on the differentials identified by the recent National Bank of Canada Housing Affordability Monitor, between median incomes and median home prices, it would mean that we would need to OVERBUILD (relative to apparent ‘demand’) by at least 50% in order for that kind of price decline to materialize – meaning, having ready built housing, in all areas of Canada, sitting finished and empty, waiting to be sold. But who is going to ‘overbuild’ just to see prices drop as a result? Who in the development / building / real estate food chain would ever want to see (or allow) that to happen?
Unless governments are going to get into the development business (and by extension, the construction business) directly, I don’t see how this would ever come about in terms of market housing. Even then, the same factors pushing construction costs mentioned in the article would apply here as well.
Maybe it’s time we looked at restricting home ownership to those who actually live and work here and need housing, as well as preventing unearned incomes and foreign capital being spent in the residential housing market.
France of 1789, that is a brilliant nutshell. Open it to find the 2008 US, indeed. With a full elimination of a respectable class of home owners. Let’s hope history will not repeat.
Brilliant analogy!