Trudeau’s housing plan is incoherent
Just like the Liberal party generally, Justin Trudeau’s housing plan is brimming with either recycled ideas that are already government policy or proposals blatantly plagiarized from the opposition. Much of it is at war with itself. It is at once a plan to stifle demand, while simultaneously boosting it. It promises to encourage development with the right hand and cripple it with the left. All the while the Liberals, much like the other parties, remain largely oblivious as to why housing prices have surged.
Unsurprisingly, the Liberal plan is obsessed with “investment property,” constantly offended at the very thought that an owner of private property would want to determine how best to use that which they lawfully own. So they promise to “ban new foreign ownership,” tax existing “foreign-owned vacant land,” and bring in an “anti-flipping tax on residential properties.” They also vaguely promise to put an end to “excessive profits” generated by large investment companies that buy up rental housing.
Whether or not any of these policies would be successful at lowering house prices, one might conclude that at least that is what the Liberals want, to force demand down. But much of the rest of their plan actively works in the opposite direction. The Liberals want to double the homebuyer’s tax credit, offer a tax free “first home” savings account, lower insurance costs, increase the cut-off for an insured mortgage and add flexibility to a program that lends first-time homebuyers a portion of their down payment.
These are mostly tweaks of existing policy that, if they accomplish anything, will increase demand. But without more supply that only raises prices further.
The one redeemable peg in the Liberal housing plan is to offer cities funding only if they grow “housing supply faster than their historical average, reduce approval times, help establish inclusionary zoning bylaws, and encourage transit-oriented development.” This is a more detailed version of a similar promise made by the Conservatives, and it is notable that the Liberals are finally recognizing that municipal zoning bylaws are essentially a block on new development. But whatever gains in newly built housing this plan might generate would be offset by the Liberals’ promise to put an end to so-called “renovictions” by using a form of national rent control. If you want people to build rental housing, limiting their ability to set rent won’t help.
The Liberals are not alone in their incoherency about housing. Neither the NDP nor the Conservatives have offered a plan that accomplishes more than to give party leaders the ability to say they have a plan. As with climate policy or health care, having a housing a plan, even a contradictory and pointless one, remains preferable than no plan, unfortunately. The fixation on foreign buyers is particularly curious, given that non residents account for only about four per cent of property owners in Vancouver and less than three per cent in Toronto, rates that have remained stable in recent years, according to Statistics Canada.
Earlier this week, I argued that city zoning and land-usage rules act as a drag on building new housing. A 2018 C.D. Howe Institute study concluded that between 2007 and 2016 barriers to development added up to as much as 50 per cent of the price of a new home.
But, as the Liberals remain committed to the notion that demand for housing must be tamed, except of course when they are trying to actively stoke it, it is curious that they have so far ignored perhaps the largest driver of demand: monetary policy — specifically, the Bank of Canada’s low interest rates and quantitative easing policy.
The Bank cut its short-term “policy interest rate” to 0.25 per cent to help encourage borrowing and spending during the pandemic-induced recession. That was after a long period of historically low rates. Before the 2008 financial collapse, the interest rate was above four per cent but it has been below two per cent ever since. With less room to reduce rates further, the Bank has also bought up government bonds, which helps lower long-term interest rates further, thus encouraging even more spending and borrowing.
As loans have become cheaper and cheaper, investing in real estate has become that much more attractive. So, though banning foreign buyers or attempting to stop investment firms from purchasing rental properties might well reduce demand somewhat, it certainly doesn’t address why demand is high to begin with. Just as it doesn’t address what happens to prices when artificially high demand meets artificially low supply.
Low interest rates, combined with the federal government’s expansive fiscal policy, mean inflation has been brushing up against four per cent for months, resulting in effectively zero- or even negative-interest rate loans in real-dollar terms.
As it happens, the Bank of Canada’s agreement with the federal government is set to be renewed by the end of the year. So now would be an opportune time to discuss whether the Bank should remain committed to controlling inflation as its core mandate, possibly by setting a lower target than the current one to three per cent, or, as some propose, including maybe even the Bank’s governor, venture off into new and unfortunate policy territories such as employment, economic growth or even climate change. Using central banks as tools for social policy could be corrosive, as we are witnessing now.
Of course, when Trudeau was asked about interest rates last week he said, referring to his “most important” economic priorities, that “you’ll forgive me if I don’t think about monetary policy.”
I wonder if anyone in the Liberal party thinks about housing policy.
LARGELY OBLIVIOUS AS TO WHY HOUSING PRICES HAVE SURGED.