The high prices of homes have been leading many Canadians into taking out mortgages so large that they risk not being able to service them when interest rates increase, as inevitably they will at some time in the future. This risk represents a danger for the entire economy as mortgage defaults endanger the solvency of lenders and the distress sales of homes can lead to a collapse of the market for existing and new homes.
To combat this risk, the government of Justin Trudeau in 2016 tightened regulations specifying conditions under which lenders can issue mortgages. Applicants must pass an eligibility test, which ensures that they can meet mortgage payments when interest rates increase in the future. This policy reduces the demand and prices for homes. It thus also lowers the affordability crisis for homes that is one of the most serious problems facing many Canadians.
But then in the 2019 federal budget the Trudeau government introduced another housing policy, labelled “First-Time Home Buyer Incentives”. It authorizes the Canada Mortgage and Housing Corporation (CMHC) to acquire an equity share in any home bought by a first-time buyer – 10 per cent for a new home, 5 per cent for an existing home. When the home is sold, the investment made by the CMHC is repaid, together with a share in the capital gains. Incidentally, this policy is used widely in Muslim countries where Sharia Law prohibits any charging of interest on loans and mortgages. The effects of this policy will be an increase in the demand for housing and upward pressures on prices.
It remains to be seen whether these two policies working in opposite directions will increase or decrease the affordability crisis, but the net effects are likely to be very small. They are guaranteed, however, to lead to the hiring of many new civil servants and higher deficits or taxes to pay for them. At the same time, ordinary Canadians will be forced to spend more money and time to comply with the new laws.
While the federal government policies just discussed affect the demand for housing, some recently adopted provincial and municipal government policies increase the supply through reductions in the cost and delay of obtaining building permits. These policies are unlikely to increase the supply of housing significantly since the cost and time savings are trivial relative to the total cost of construction. Governments also have issued direct financial subsidies for the construction of rental housing. These policies also are unlikely to have much effect on the cost of rental housing since they also are very small relative to the total demand and existing supply.
The BC government imposed an interesting, innovative policy to increase supply. It taxed unoccupied dwellings to induce owners to rent out or sell them. This tax is popular with many because it is expected to fall on speculators and money-launderers from China but has turned out to be very unpopular with ordinary Canadians who own unoccupied dwellings for recreational and other legitimate purposes. Most important, the tax has a fundamental flaw. To the extent that it causes speculators to sell their investments, it increases supply only in the short run. In later periods, it reduces supply because speculators no more have houses to sell.
Unfortunately, the federal government has failed to act on the only sure-fire way to combat the crisis in housing affordability – reduce the demand for housing by immigrants. Few Canadians are aware of the magnitude of this demand.
|Chinese investors visit a Canadian property investment company at an international property exhibition in Beijing|
In 2018 Canada accepted 300,000 immigrants, which is equivalent of 100,000 families of three, all of which require a place to live. The vast majority of them settle in Toronto, Montreal and Vancouver. The extrapolation of government statistics from 2014 implies that in the greater Vancouver area EVERY WEEK at least 300 HOUSING UNITS are needed to accommodate newly arrived immigrant families.
Defenders of the current level of immigration argue that the affordability crisis is caused by deficient supply and not by immigrants. As discussed above, the supply policies adopted by governments after many years have not worked. The affordability crisis persists and could easily get worse as the public increasingly opposes deregulation that raises population density and the traffic congestion and over-crowded medical and recreation facilities it brings.
Needed is a temporary reduction in immigration from the present 300,000 to perhaps 50,000 or 100,000. The number can be increased again once the affordability crisis is under control and the immigrants bring benefits to the economy without imposing great costs on Canadian victims of the affordability crisis.