Canadian politicians promise to “fix” housing affordability if elected this year. Just one problem — all of their plans will increase home prices, not make them more affordable. That’s the take from Finder‘s 15-person monetary policy panel. The Fintech regularly polls Canada’s top economists for their take on monetary policy. This time they asked for their opinion on election proposals, and their impact on home prices. The vast majority of economists warn these promises will not improve affordability. Actually, it’s worse than that. These policies are designed to actually boost home prices.
4 In 5 Economists Agree — Canadian Politicians Are Trying To Push Prices Higher
The majority of economists agree, none of the platforms will help with affordability. The panel showed 4 in 5 (79%) of the top economists felt these plans will not help with affordability. Most actually agreed, the election promises are designed to push home prices higher.
Well, at least 1 in 5 of the top economists agree, they’ll help with affordability, right? Not exactly. The other 21% of economists weren’t sure if they were helpful or not.
Canada’s Top Economists Warn These Plans Will Push Prices Higher
Most promised affordability measures include subsidies for buyers. As discussed yesterday, these are called “demand inducement schemes.” The goal is to create more demand, which tends to push prices higher, not lower. But free money sounds good, doesn’t it? Unfortunately, it sounds good to the seller as well. Now, who is in the better position to capture capital from the other?
Noted research firm Capital Economics sees the promises doing little for affordability. In fact, they see the exact opposite — it acts as a boost to prices. “The focus on demand-side policies should help a small cohort of buyers looking to get into the market soon but, ultimately, will only push up house prices in the long run,” said Stephen Brown, the firm’s senior economist for Canada.
That’s just one economist, right? Perhaps Moshe Lander, professor of Economics at Concordia University feels different. “Subsidies will not reward those that need them, as subsidies are a blunt instrument that will benefit those that can already afford a home.” Oh, cool. Higher prices for those that can’t afford a home right now, and small subsidies for those that can. Totally winning.
Maybe a top econ prof at the University of Toronto will disagree, so let’s check in with Angelo Melino. Oh, he’s warning this doesn’t just increase the cost of new homes, but existing-homes as well. “You can’t improve affordability by subsidizing purchasers. This will just raise the price of the existing housing stock. Affordability requires an increase in the stock of low-cost housing,” he said.
Scotiabank also warns these policies will create more demand, which pushes prices higher. “Policy efforts to stoke demand will only increase prices. All levels of government need to do the hard work together to enable an increased supply of appropriate housing with related services in Canada’s major cities,” said the bank’s deputy chief economist Brett House.
Most Plans Focus On Housing Subsidies, Which Boost Prices
Home prices are different from typical goods, but consumers don’t understand that. A subsidy for wheat or bread drops the price, and consumers easily grasp that. It supports a market inefficiency, but those get resolved at the next harvest.
These aren’t financialized products, nor do their prices reflect future prices forever. Consumers tend to think, just a few dollars spent today will create a bridge to more affordable housing. Whether they realize it or not, that’s how they understand subsidies — it’s only temporary. Politicians know this, so they’re promising what everyone wants to hear. It’s unclear if they know these plans don’t work.
Housing is a financialized product, serving as both a utility and investment. By increasing the subsidy for a small segment of buyers, you support inefficient pricing. Unlike wheat, people consider their home a part of their financial plan. They put more and more money into it, as prices rise. Subsidies can help briefly, but they support higher prices, even for non-subsidized buyers. Doing this creates a strong base for even higher prices.
As policymakers continue this trend, households become more dependent on property. If you can’t let home prices fall now, does increasing prices make it easier to drop later? The whole system is now dependent on subsidies, and the state propping up prices. It creates more and more risk, making households more vulnerable to shock. Eroding affordability at every step along the way, until it starts to fail. It usually ends with a central bank or inflation crisis.
Prior To The Election, Home Prices Were Projected To Cool
The panel previously expected home prices to cool over the next year, prior to election promise announcements. Finder’s average of 8 economists that forecast prices, showed average annual growth of 2-3% by March. Toronto (2%), Vancouver (3%), and Montreal (3%) were the biggest surprises. The market is currently undergoing a seasonal cooling the industry had been anticipating. Elections tend to create major shifts in public opinion though. Inventory mysteriously dropped off after it was announced, helping to stop the decline. At least for a while, until the market gets a wider response.
Housing and the cost of living are the major issues this election. As a result, politicians are racing to compete to see who has the plan that looks like it does the most. Ironically, spending less towards housing subsidies and only funding social housing, is the fix. It’s just not the answer people want to hear.
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