One of Canada’s top issues this election is housing, and as usual, we’ve been getting a lot of questions by email. Instead of answering each email individually, we’re going to cover what feels like our regular election platform breakdowns. In separate pieces, we’ll drop an unbiased look at the policies promised, and the intended (or unintended) consequences.
Today we’re covering the Liberal Party of Canada (LPC) housing platform. Over the next few days, we’ll unpack the Conservative platform as well, so sign up for the newsletter if you haven’t, and want to compare.
The following is going to be broken down by demand, supply, and the Home Buyers’ Bill of Rights. Most housing policy fits in demand or supply measures. However, we separated the Bill of Rights, since it focuses on transparency. Not typical of policies to place a lot of focus on process, so it deserved its own section.
The Liberals Promise To Make More Demand To Create “Affordability”
Most of the demand measures we’re going to look at in this plan are “demand inducement schemes.” Inducement schemes are exactly what they sound like, ways to stimulate more buyers.
As home prices rise, more buyers are priced out of the market. In a healthy market, that means home prices need to fall. Think of it in tiers, with the wealthiest buyers at the top. Once that level’s demand is fulfilled, sellers have no more buyers with that level of money. It doesn’t matter if you’re asking for $1,000,000 if people only have $900,000 available. In this scenario sellers may have to lower the price to liquidate in a timely fashion. This occurs again and again, assuming supply is greater than demand.
Using a demand inducement scheme, you’re essentially saying, “I don’t want prices to fall. We’ll make it so the second tier can borrow more money!” Rather than let prices fall, they look for ways a buyer can pay more. This helps to prevent prices from falling, or softens any price declines. Sometimes it even provides a footing for prices to rise even higher.
Why does this sound like it helps sellers more than buyers? That’s because that’s what it’s normally used for — to boost prices in a weak market. Similar strategies were used in the US after the Dot Com and US Housing bubbles popped. They didn’t pitch it as a benefit for home buyers though. They flat out said this was to help home prices grow, after a recession.
We won’t bore you with the details of the US programs, again. We already covered them during the 2019 election, when similar strategies were proposed. That was just before they were rolled out, and it made Canada the affordable place it is today…
Now that you know what a demand inducement scheme is, let’s take a look at all of the ones The Liberals are promising.
First up, is the national rent-to-own program the LPC has promised to roll out. Rent-to-own is when a home is rented, with the renter reserving the right to buy it later. The price is typically agreed upon upfront, so there are no surprises. A portion of the rent is applied to the down payment. If you choose not to buy it at the end of your lease, the down payment portion applied is forfeited.
Currently, this is a niche product due to the cost involved. Rent-to-own properties are typically more expensive than regular rent. The LPC plan is promising $1 billion to make it happen on a national scale. They’re also promising people will pay below-market rates, and have a down payment after 5 years. Materials also state this will apply to some condos, as long as the landlord agrees to certain rules. Ambitious plan for not a lot of money.
As mentioned above, this would be considered an inducement scheme. They’re getting buyers to commit to buying a property, five years ahead of when they would buy. That aside, the program doesn’t totally make sense for a few reasons:
- Rent-to-own should cost more, not less than market rates. Only a small portion of the payment is applied to the down payment.
- Many markets are “negative cap,” and landlords don’t collect enough rent to cover bills. Providing below-market rates means a substantial government subsidy… for a unit that may not be purchased.
- Down payments are huge. This strategy wouldn’t work for most of Ontario. In Toronto, a typical condo would require $679/month put aside for 5 years for the minimum downpayment. At 2% interest, carrying costs are $2,696/month plus taxes, maintenance, and insurance. Only wealthier households would be able to afford a rent-to-own program… which is just odd.
The Tax-Free First Home Savings Account (TFFHSA)
The Tax-Free First Home Savings Account (TFFHSA) is proposed to help “young” people save. People under 40 would have access to a new account, allowing up to $40,000 in tax-free savings for a down payment on a home. Sounds great, except only higher-income households can use it, and experts warn against it
Canadians now have access to two tax-planned accounts — an RRSP and TFSA. Households can already borrow from their RRSP for a downpayment, up to a certain limit. A TFSA can also be drawn on at any time, for no additional taxes on the gains made. A household saving 25% of their income would need to make $135,000/year to max out both of these plans. That’s about 50% higher than the median household income as it is.
Further, even the banks have been saying don’t extend down payment assistance. Experts warned against extending the amount that can be borrowed from an RRSP. Allowing buyers to divert more income to housing creates insufficient diversification. A lack of diversifying creates a strong vulnerability to shock. RBC warned in the piece linked above, this can destabilize the entire economy. And people say I’m gloomy.
Oh, yeah. The average first-time homebuyer in Toronto was 37 in 2019. These accounts fail to recognize another issue — milestones are being pushed further back. Maybe they just gave up on Millennials, and are starting from scratch with Gen Z?
The First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive (FTHBI) is getting a revamp if the LPC is re-elected. In the existing plan, the government pitches in on your purchase. The state becomes a part-owner, and you cover its share of maintenance. You repay the government when you sell, and they ask for their cut of the ownership. In exchange, you get lower monthly payments.
In the revamped plan, they don’t want to be your co-owner. They’ll lend you a second mortgage, where the payments kick in at a later date. It’s similar to a plan that was rolled out in BC, and considered a spectacular failure. Escalating costs lead to temporary, artificially low carrying costs. This allows people to carry more than they might be ready to carry, inflating prices.
First-Time Home Buyer Tax Credit
The First-Time Home Buyers Tax Credit (FTHBTC) might be doubled if the LPC is re-elected. The credit would increase savings for first-time buyers from $5,000 to $10,000. In a normal period, this is a great way to save money and redirect cash into the economy. When prices are rapidly rising, like now, the market is likely to just absorb the costs in home prices. As a bonus, taxpayers get to cover another $5,000 in expenses that they didn’t have before.
Reducing Insured Mortgage Insurance Fees
The plan no one asked for, but is being proposed anyway — reducing mortgage insurance fees. For those that don’t know, if you don’t have at least a 20% down payment, you need a high ratio mortgage. Mortgage rates are based on risk, and people with small down payments are riskier. To ensure lenders will lend to these folks, without a high rate, they have to buy insurance. If the borrower defaults, the lender can recoup losses from the insurer. If the insurer can’t pay out, the government tops it up.
Any time more credit is introduced, home prices rise more easily — since people have more cash. By lowering insurance costs, buyers have more cash to purchase. They’re also pulling forward demand from buyers who would buy later, but don’t have to save as much. By creating more demand, they’re pushing prices higher — not lower. Any savings would more than likely be consumed by higher prices in this environment.
As a bonus, the insurance is largely from Canada’s state-backed insurer. That means taxpayers collect less revenue to offset taxes, and risk exposure rises. To top it off, it’s more likely to contribute to higher home prices than lower prices.
Experts Say Reducing Demand Should Be the Primary Focus
Even Canada’s banks have been warning the supply side is taken care of. What the country needs is a greater focus on curbing demand. By extending more and more cash, Canada is stimulating unhealthy levels of demand. It doesn’t matter how much you build if you can keep finding demand for it. The current government doesn’t appear to be a huge fan of that. They’re going to double down on creating demand, and see what happens.
Liberals Promise More Housing Supply, But Might Not Create Any
On the supply side of the platform, they’re promising to increase it by a buttload. Supply is the other significant part of the equation, as discussed before. When supply is sufficient to the point competition is low, prices stop rising as fast. If supply reaches the point of excess, home prices can even *gasp* crash. But here’s the tricky part — what does excess supply mean?
Most people think building more than enough homes for people to use means excess supply. However, that would require homes only to have a single utility of use. That’s not the case in the current environment, especially in Canada. Homes are money laundering mats, inflation hedges, makeshift hotels, and even Halwa payments. There are tens of thousands, if not hundreds of thousands, of homes in Canada that aren’t used for utility.
Excess supply is dependent on demand, which is determined by liquidity. As long as more and more buyers keep coming to market, there is no excess demand. As long as it’s profitable and the government pumps cash into the market, it’s attractive. That said, let’s look at the proposed supply measures.
Tools To Speed Up Housing Construction
The Liberals promise to speed up housing construction with a new fund. The Housing Accelerator Fund would be a $4 billion fund to help create 100,000 new “middle class” homes. At $40,000 per unit, about 5% of the cost of a typical Toronto condo, it’s a generous plan, to say the least. What this plan doesn’t do is explain in any significant way how it will accelerate building new homes.
Red tape does result in significant costs, ultimately carried by the user. How much red tape is the result of regions conducting proper planning? Not just in terms of the build quality, but the environmental aspect.
Toronto is a great example. It’s the perfect combination of high density, aging sewer systems, and a lack of drainage. Insufficient drainage results in the City regularly flooding downtown, causing billions in damage. These costs then get passed onto insurance companies, which pass them to homeowners.
With climate change accelerating, 100-year floods have occurred six times in 14-years. A system planned to fail every 100-years, fails an average of just over 2 years, needs a little planning. Just erecting more towers doesn’t necessarily lower the costs if it’s junk in a few years.
Most developers have also recently been saying red tape is less of a cost than labor these days. Canada is building at a near-record pace, placing a demand on labor and materials. Demand applies to all components of housing. Construction workers are highly skilled, especially in high-rise, and aren’t very mobile. When building scales up faster than construction workers, we get a labor squeeze. The cost of building rises, passing those costs onto consumers.
Co-Investment and Office Space Conversion
The National Co-Investment and office space-to-residential conversion fund have been proposed. The co-investment fund is promising $2.7 billion over 4 years to help developers build. The office space conversion fund will be $600 million, to convert offices to homes. These are separate funds, but they do the same thing — provide a developer subsidy.
The non-partisan parliamentary budget officer (PBO) recently tore down similar plans. In a short period of time, these programs are more likely to take credit for existing projects. Developers are starting a new home for every 1.4 people of ideal population growth. They aren’t holding back on building, so giving them more capital doesn’t mean they build more. They largely just make developments more profitable, and take credit for existing supply.
The Home Buyer Bill of Rights
The Home Buyer Bill of Rights isn’t quite supply, isn’t quite demand — but it deserves its own section. The first five points are definitely in favor of home buyers:
- Ban blind bidding
- Legal right to home inspection
- Ensure total price transparency on the history of recent house sale prices
- Agents have to disclose all transaction participants
- Move forward with a publicly accessible beneficial ownership registry
Canada is one of the most opaque real estate markets in the world, so transparency is welcome. It just might not make housing more affordable at scale, or even for buyers technically.
Banning blind bidding might eliminate shenanigans at a few sales that hold offers. Eliminating the process in Australia certainly didn’t help reduce prices there though.
Home price history is strangely controversial in Canada, but would bring more transparency. Nova Scotia has always had widely accessible home price data though. That didn’t stop it from recently being one of the fastest-rising markets in the country.
An interesting point in the Bill of Rights is regarding payment deferrals.
- Ensure banks allow mortgage deferrals for 6 months for job loss “or other major life events”
This measure would extend pandemic-style payment deferrals very generously. As it is, most lenders already allow payment deferrals in emergencies. They always have. These rules would force lenders to provide a predetermined amount of time. It’s a little odd, considering lenders have to put aside capital for a paused payment.
During the pandemic, global banks agreed — they wouldn’t put aside extra capital. This allowed them to hand out deferrals to anyone that asked, without any vetting. By forcing lenders to provide six-month deferrals all the time, it’s not clear if they have to put more money aside. If they do, you better believe they’ll pass on the costs to all other mortgage borrowers.
The last point for homeowners is regarding mortgage lenders.
- Require mortgage lenders to fully inform buyers of the range of financing choices and programs available
I have yet to find a mortgage lender that doesn’t provide various programs currently. They also always provide the full details of the mortgage in the contract you sign. The question is, do home buyers understand what’s presented? Does this have a material impact, or is it just for optics?
Renters are voting this election, a lot of them. That’s forced the federal government to consider the demographic in ways typically reserved for local governments. Let’s start with renovications.
The LPC promises to stop renovictions — evictions due to claims of large renovations. Often landlords will buy a unit (or building) and demand a tenant vacate for a renovation. The sketchiest of landlords will often do it in an illegal manner.
In Ontario, the landlord needs to have the provincial government’s approval to evict a person from the unit. In theory, if the tenant vacates, they often have a “right of return.” This is the ability to re-occupy the unit without an increase in the cost of the unit. Though in reality, they often hope the tenant is obligated to pay rent elsewhere, and never comes back.
They aren’t totally clear on how they plan to prevent the illegal handling of this practice. They only say, “by deterring unfair rent increases that fall outside of a normal change in rent.” This point is one that should exist, although no further details were given on the implementation. It would be odd to limit above guideline rent increases at a federal level.
Anti-Flipping Taxes To Target Housing Speculators
Anti-flipping taxes sound nice in theory, but there’s little evidence they do much. If a homeowner buys and sells a property in less than 12 months, they’re hit with an additional tax. Sometimes called a Tobin’s tax, the theory is people will make fewer trades if the fees are higher. Transactional taxes are popular, but proponents often don’t factor in the behavioral change.
Studies on Tobin taxes for real estate haven’t found these to be particularly effective. They generally find it reduces informed trade activity, but not necessarily casual speculators. It also reduces total trade volume, but decreases the market supply with it. This results in greater price volatility, with experts generally cautioning against the idea.
There’s also the compounding issue of it fading in a relatively short period of time. Holding for 12 months isn’t that long in terms of property. It’s short enough that the incentive to hold a little longer is greater than the pain of paying the tax. It is long enough to cause a gap in the market, and result in more supply droughts though. This can see less supply at market, and apply more pressure to home prices.
Targeting Large Corporate Owners of Real Estate
The LPC promises to target large corporate owners of real estate to curb “excess profit.” They’ll review tax treatment of investors “amassing portfolios of rental housing in Canada.” They also plan to put policies in place to curb excess profit. Sounds great, if you don’t understand why they’re acquiring property in the first place.
The strategy makes it seem like a group of sinister rental companies are flipping homes. In reality, low interest rates are the primary cause, because they destroy bond yields. When this happens, institutions like your pension need a new fixed income replacement. They took money that would normally go into bonds, and gave it to alternative asset managers. Those managers bought housing — a lot of it.
They get capital for nothing, rents rise at inflation, and low rates push prices higher. In cities with out-of-control rents, they can even see rents rise faster than inflation. This is an issue of preferential treatment of capital, slanted to issuing cheap debt. That’s a structural issue with governments addicted to credit-based growth over productivity. Not a tax issue.
Banning Foreign Buyers For 2 Years
The LPC promises to ban foreign buyers, but how much of an issue is that today? Projects are pitched to overseas investors, but they tend to sell before completion. This avoids the foreign buyer tax, and would likely avoid restrictions on ownership.
Foreign capital, on the other hand, is still a huge issue — and has been for decades. Residents arriving in the country, or sending a proxy to purchase, has long been an issue. Canada’s tax authority recently revealed they found new immigrants with poverty-levels of income buying mansions was a structural issue… 25 years ago, when they first studied it. They hid the results of the study, and for decades politicians attacked anyone that said it was an issue. A foreign buyer ban still doesn’t address this issue, so much as it pretends to.
A lot of measures just to avoid increasing interest rates. I feel like a lot of problems might be solved if every politician was required to read The Old Lady Who Swallowed A Fly.
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