Interest rates stay the same—so do hot housing prices

To cut or not to cut? That truly was the question and Bank of Canada governor, Stephen Poloz, answered this morning by maintaining the bank’s overnight target rate at 0.5%.

The Bank of Canada announcement this morning that rates will remain the same is meant to send a message: That our nation’s economy is clearly not out of the woods, just yet.

If Poloz had lowered interest rates today, for a third time this year, the cut could’ve boosted exports and challenged other countries to push their currencies lower. Instead, it signals that we are still struggling economically—and it will probably add fuel to the debt-binge fire.

And why not? Put bluntly: it’s expensive to buy a home in Canada right now. But it’s not how much our homes cost that should concern us—it’s how out-of-reach home ownership has become for many Canadians.

In the last 15 years house prices have risen 127%—nearly 50% since 2006 alone. Some salt for that wound? In the late ’90s, the average house price was $154,620, five times the average income at the time. Today, the average home goes for $379,725, and it now it takes 7.8 times the current annual salary to buy it. Ask someone house-shopping in Vancouver or Toronto, where the average home now costs more than $1 million, and they’ll tell you it’s worse. Much worse.

“There’s no question that in Canada we are in a real affordability crisis right now,” says John Andrew, a professor of urban planning at Queen’s University. When large segments of the population feel they’re missing out on the dream of home ownership, then we have to concede it’ll take more than higher salaries to correct our housing problem.

Many of the usual stop-gap solutions have surfaced. Social housing proponents press for more rental units, arguing that many Canadians would be better off staying out of the market entirely. That may be true, but it doesn’t quite address the issue. Others would rather inflate mortgage rates to slow price increases, or raise minimum down payments required. But higher rates only further erode affordability, while increased down payments hurt those struggling the most: first-time buyers.

Then there’s the idea that a foreign-ownership tax could help cool the housing sector, a theory based primarily on the research of UBC geography professor David Ley, who found that well-off immigrants and foreign real estate speculators have a “trickle-down effect” that helps inflate prices in all housing market segments. This doesn’t mean a foreigner-go-home tax is the right way to go, but Ley is right to criticize our government’s lack of action. “In other countries there is a much more active attempt to respond to the shelter needs of the citizens,” he told the CBC in May. So, what will help? There are other tools in the government’s belt that aren’t being utilized.

Build family-sized condos. One of the biggest contributors to rising home prices is a lack of land. It only makes sense that developers and municipalities now look up rather than out when adding new housing stock—a shift that starts with new zoning and amended building laws. The idea isn’t new, but it works. In 2005, the Ontario government created a plan that put an emphasis on urban densification. Developers, motivated by profit, maximized this plan by building mostly smaller one- and two-bedroom units, which are not suitable for growing families.

To change this, however, requires government intervention. How do we know? Because in the ’80s, Ontario was hit with a different type of housing crisis: rapidly appreciating rental rates due to a scarcity of new rental units. The province stepped in, exempted new rentals from rent control and gave builders tax incentives to build purpose-built rental buildings. It worked—and with a greater supply of units in the market, rental rates dropped and stabilized.

Tax housing, not income. There’s another option to slow the steady march of housing prices, but I promise you won’t like it. We don’t currently pay tax on the profit earned from the sale of our primary residence. We do, however, pay progressive tax on the income we earn—and Thomas Davidoff, an economics professor at Sauder University, sees a real disconnect with this.

He uses himself as an example. In 2009 he bought a North Vancouver home, which he thought was overpriced. After three years his family decided it wasn’t the right neighbourhood for them and put the house on the market. The sale put an extra $400,000 in Davidoff’s pocket—and he didn’t pay a dime in taxes. “I was wrong about prices, wrong about future value, and I was still rewarded for my dumb luck,” he says. He compares this to his professional life, where he spent the better part of 10 years completing a bachelor degree, then a master’s degree, before finishing his PhD in economics. Today, Davidoff pays the government $0.42 in tax on every dollar he earns. “Getting my PhD damn near killed me. Why is my dumb luck rewarded but my hard work penalized?”

Davidoff suggests the federal government tax capital gains made on the sale of a property. The tax could be also be progressive. “The U.S. allows homeowners to shelter some gains, but taxes all profit above a certain threshold.” More important is what a new tax structure would do to affordability. By taxing property profits, you reduce the number of speculators and real estate investors who help to inflate housing prices. Of course, “these changes are politically challenging,” says Davidoff, “Homeowners are a politician’s biggest voting block.”

Still, those elected to political office need to take initiative—and put housing affordability for the many before the political aspirations of a few. To do nothing would mean we accept that $1 million for an average home is the new norm in Canada.