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.