Housing plan is mostly politics

Low interest rates are real cause of housing bubble

Ontario’s new fair housing plan is a potpourri of politics with a few good ideas mixed in.

If Toronto and surrounding areas are indeed caught up in an irrational real estate bubble, the measures announced last Thursday may well burst it. As the Dutch discovered during the Tulip Craze of the 17th century, bubbles based on nothing are easily deflated once the speculators’ bluff is called.

But if there is more at play than pure speculation in Toronto’s frenzied real estate market, Premier Kathleen Wynne’s plan is unlikely to make much difference.

The centrepiece of the plan — a 15 per cent tax on foreign non-residents who buy homes in the Greater Golden Horseshoe area around Toronto — is fatally flawed.

First, there is no evidence that foreigners are fuelling the surge in housing prices. Even Ontario Finance Minister Charles Sousa estimates that, at most, non-residents are involved in only eight per cent of housing sales.

Second, any number of foreigners would be either exempted from the tax or eligible for a refund.

These range from foreigners enrolled for two years as a student in Ontario, to those who have legally worked for one year in the province, to those who have become citizens or permanent residents.

A broadly based speculation tax that covers Canadians as well as foreigners would make more sense. But for a government already low in the polls, it would be a political nightmare.

Better to focus on foreign non-residents, even if doing so won’t accomplish much. Foreigners can’t vote.

Similarly, a proposal to let Toronto and other municipalities levy a tax on vacant homes probably won’t make much substantive difference. Even if this is a widespread problem, it is easy to make an empty home look occupied.

But her proposal does allow Wynne to repair relations with Toronto Mayor John Tory, an enthusiastic proponent of the tax.

Tory’s last attempt to impose a new municipal levy, through road tolls on Toronto expressways, was summarily rebuffed by Wynne. This is her chance to make up.

There is also more politics than policy in the Liberal government’s plan to expand rent controls to all units, including those built since 1991.

Rent controls can work if they are combined with massive public expenditures for housing. But on their own, they usually don’t. As Ontario’s NDP government conceded in 1991 when it eliminated rent controls on new units, they can make matters worse. That is likely what will happen here.

Still, there are some good ideas in Wynne’s 16-point plan. One is a proposal to let municipalities levy higher property taxes on vacant land approved for new housing. This could persuade developers sitting on fully serviced land to build.

Another is to leave the Greenbelt alone. Developers have been urging the government to ease restrictions on growth in the Greenbelt around Toronto in order to let them build more subdivisions. Wisely, the Wynne government has decided that in this, at least, it will not accommodate them.

The premier has pledged to sell off excess government land in order to “leverage” more housing. That could work out. Or it could be a giant Harbourfront-style barbecue for developers. History favours the barbecue.

The greatest failing in Wynne’s 16-point plan is not her fault. It is that the real cause of skyrocketing home prices — low, low interest rates — is outside the provincial government’s control.

Housing prices are high in the Toronto area in part because a lot of people want to live here. But they are high also because the money required to fund such dreams is unusually cheap. Wynne and Sousa can’t do anything about the latter. Bank of Canada governor Stephen Poloz can but, for his own good reasons, won’t.

If the central bank were to hike short-term interest rates, the loonie would rise and the country’s recovering export industries would suffer. Poloz won’t countenance that.