By Josef Filipowicz
and Steve Lafleur
The Fraser Institute
Late last month, Finance Minister Bill Morneau said the federal government is considering ways to make housing more affordable for millennials. While he didn’t mention specifics, a one-size-fits-all plan for the entire country isn’t likely to solve housing affordability woes in expensive cities like Toronto and Vancouver.
The federal government is already heavily involved in the housing market, for better or for worse.
It boosts demand, for instance, by offering capital gains exemptions on home sales (for primary residences) and interest-free borrowing from RRSPs to fund down payments. It also tries to tamp down demand by raising the minimum qualifying interest rate to obtain mortgage loans – the mortgage stress test.
If you think these policy objectives are at odds, you’re correct.
The demand-side thinking favoured by many politicians often ignores the impact of both supply and demand on housing prices.
The federal government can be forgiven for not saying much about the supply-side of the equation, since local factors largely drive affordability concerns.
Compared to five years ago, average home prices are up almost 60 percent in the greater Toronto area and 70 percent in metro Vancouver (despite a recent dip). During that same period, prices fell in struggling markets such as Calgary and Saskatoon.
Clearly, house-price dynamics can vary wildly according to region.
Prices have fallen in markets where stagnant or declining economic activity has reduced housing demand, and risen in cities where supply constraints have held back growth in the housing stock. It isn’t much more complicated than that.
Loosening supply constraints in markets such as Toronto and Vancouver will require provincial and municipal governments to tailor solutions accordingly, rather than a central plan hatched by the federal government that may actually hurt would-be homeowners.
The stress test on mortgage applications enacted by the federal government in early 2018 was a response to affordability concerns in a few markets. But it has done collateral damage to other cities that weren’t facing the same challenges.
According to one analysis, a family hoping to qualify for a mortgage on a $300,000 house in Winnipeg now requires an annual income of roughly $60,000 (the median household income in that city is $68,000) and a $60,000 down payment.
It’s not clear why the federal government, in an effort to address skyrocketing home prices in Vancouver, should make it more difficult to qualify for a mortgage and buy a home in Winnipeg.
Similarly, other blunt policy instruments such as a first-time homebuyer tax credit likely produce unintended consequences that ripple through the country’s housing markets, such as more bidding wars in high-demand, low-supply markets.
Clearly, affordability concerns in specific markets are best tackled by local and provincial governments. As the governments that control the stock and flow of housing (through land-use regulation and the building permit process), they’re far better suited to respond to spikes in demand by enabling the construction of more housing.
It’s not uncommon for different levels of government to concern themselves in the business of other levels – for better or for worse. However, the federal government should resist the temptation to further involve itself in housing markets (election year notwithstanding).
Its involvement has largely ignored the critically important supply side of the equation and the very different needs of individual communities across this vast country.
Fixing housing markets is a job best left to others.
Josef Filipowicz and Steve Lafleur are analysts at the Fraser Institute.