COVID-19 has produced any number of weird outcomes, from conservatives advocating for a basic income to a failing video game retailer briefly becoming the most talked-about company in the world. But maybe the weirdest of all has been the U-turn in Canada’s housing market, which recovered from some weakness in early 2020 to post a rally that caught almost everyone off-guard — and has raised some difficult questions for policy-makers across the country.
Last May, in the face of data that showed resales falling by 57 per cent and the average price of Canadian homes plunging by 10 per cent, the Canada Mortgage and Housing Corporation released a forecast suggesting prices could drop by nearly 20 per cent in its worst-case scenario. Instead, they’ve rallied more than 20 per cent in places like Vancouver and Toronto, where the price of the average home — including condos — just crested the $1-million mark. Meanwhile, a house that was listed in east Vancouver for $1.72 million went for $872,134 over asking after nine days on the market.
This might seem like a good news story, and for Canada’s homeowners — especially the ones in major markets like Vancouver and Toronto — it clearly is. But while we’ve averted one economic disaster, we may be inviting another down the road. Housing now makes up nearly 10 per cent of Canada’s GDP, which is approximately 50 per cent higher than our historical average and twice that of the United States.
“To say ‘that’s an all-time high’ would be an understatement,” BMO chief economist Douglas Porter wrote in a recent note.
The danger here isn’t just that Canadians are taking on even more debt than before and putting themselves directly in the line of fire if interest rates have to rise in response to a surge of post-COVID inflation. It’s also that all of these dollars flowing into housing are being drawn away from other opportunities and sectors.
As economist Kevin Carmichael wrote back in January, “the world is in the midst of a transformative shift to a digital and carbon-neutral economy, a once-in-a-lifetime investing opportunity, and where are Canadians placing their bets? Houses, for the most part.”
And while those bets may be paying off for Canadians on an individual level, in the aggregate, they could prove disastrous for the country as a whole. “An exuberant housing market will continue to be a magnet for capital and entrepreneurial energy that would be better deployed in more productive industries,” Carmichael wrote. “Thousands of entirely rational decisions could unwittingly erode Canada’s competitiveness.”
So what can governments do to break this collective fever? Non-resident speculation taxes like the one implemented in British Columbia may help at the margins, but they’re clearly not enough on their own. And while the Liberal government in Ottawa may introduce some pro-affordability measures in its forthcoming budget, it won’t want to risk upsetting homeowners in advance of a widely expected election. But if those Liberals win a majority of seats, as most of the recent polls predict, they should use their new mandate to do something bold: tax the massive capital gains accruing in many people’s homes.
As it stands, those gains are exempt from taxation, and that exemption can theoretically be claimed multiple times. But by establishing a lifetime ceiling on the capital gains exemption for principal residences — say, $250,000 — the federal government could throw a splash of much-needed cold water on an overheated housing market and capture some of the excess gains it has created.
It’s unlikely to have an immediate or appreciable effect on prices, since those are driven far more by supply (which is being constrained by the influence of NIMBYism on local planning decisions) and demand (which is being juiced by the ultra-low cost of money). But it would give the government a predictable new source of revenue, one that could be immediately put to more constructive and productive uses — say, by funding a reinvigorated national housing program that supports the construction of affordable units in our increasingly unaffordable urban markets.
Canadians would still have the equity in their homes from paying down their mortgages and would be able to pass that onto their children if they so choose. Home ownership would still be an effective and important way to build wealth, but it would no longer offer Canadians with a free call option on a speculative frenzy, and it wouldn’t exacerbate the existing challenges we already face with income inequality and intergenerational equity. And as silent partners in the latest surge in prices — federal support programs, after all, have almost certainly supported the demand for housing — the Canadian taxpayer should be entitled to a piece of the profits arising from them.
This would have the added benefit of effectively targeting the regions where housing prices have become most irrationally exuberant without punishing people living in locations where things have been more sedate. In Calgary and Edmonton, for example, house prices have barely crept back above their 2007 levels, so homeowners there would be mostly exempt from any new capital gains inclusion of principal residences.
It would also protect younger homebuyers, who have just gotten into the market in recent years (and missed out on most of the run-up in prices), and potentially open the door to more of them in the years to come.
Yes, conservative politicians and members of the real estate industrial complex would cry bloody murder about this idea. But with a four-year mandate and a clear need to address both the growing affordability problem in Canada’s biggest cities and a looming productivity issue in the economy as a whole, the Liberals should be willing to weather that storm. If they don’t, we’ll all end up paying the price down the road.
Ref: National Observer