MONTREAL ― When Liberal Families, Children and Social Development Minister Jean-Yves Duclos announced the rollout of the federal government’s First-Time Home Buyer Incentive at the end of August, he stood at a construction site in Richmond Hill, Ont., a battleground riding north of Toronto and ― according to a recent analysis ― home to one of the worst rental housing crises in the country.
When Conservative Leader Andrew Scheer announced his party’s plans to help homebuyers, he did so not far away, in Vaughan, another city north of Toronto that makes the list of places with the worst rental crises.
So it’s quite telling that neither the Liberal nor the Conservative mentioned rental housing.
Instead, the focus was on homebuyers, with Duclos extolling the virtues of the new First-Time Home Buyer Incentive, while Scheer announced a series of policy changes, including removing the mortgage stress test for mortgage renewals and extending the maximum length of insured mortgages to 30 years from 25 (which would undo a move to limit mortgage lengths made by the previous Conservative government).
Watch: Why rents are skyrocketing in Canada, and what can be done about it. Story continues below.
The ugly truth is, neither of these proposals will do anything noticeable to improve the housing affordability crisis in Canada. They won’t even do much good for the people they’re ostensibly meant for: first-time homebuyers.
And that is probably by design, because an actual, effective policy to improve housing affordability would also be one designed to lower house prices. And in a country where two-thirds of households own their home, championing a policy that helps renters at the expense of homeowners is risky politics.
From an affordability standpoint, both the Liberal and Conservative plans fail in much the same way: They get people to spend more money on the same supply of housing.
And in a country suffering from an increasingly obvious new housing shortage, any additional money entering the market will translate into higher prices.
“The degree to which we help a certain group correlates to upward pressure on house prices,” said James Laird, co-founder of Ratehub and president of CanWise Financial. “We can’t help some people enter the housing market without understanding that we are increasing demand by that same amount.”
Analysts quickly came out to criticize Scheer’s plan, arguing that longer mortgages and a looser stress test will translate into higher house prices.
“If we’re concerned about Canadians’ level of debt, why are we helping them take on more debt?” asked Tsur Somerville, a professor of economics at UBC’s Sauder School of Business, in an interview with The Canadian Press.
The industry likes Scheer’s plan
Yet many in the industry, including Laird, prefer Scheer’s proposal to Trudeau’s, arguing that 30-year mortgages are better than the government taking a sizeable cut of your home equity gains. Still, any advice from mortgage brokers here should be taken with a grain of salt. Thirty-year mortgages mean an extra five-year mortgage term for most Canadian borrowers, meaning more commissions for brokers.
The brokers may have a point, though, about Scheer’s plan to eliminate the mortgage stress test for renewals. Many have argued that because the test doesn’t apply to people who renew with the same lender they had before, it essentially “traps” some people with their current lender, while not really ensuring responsible lending.
“Ratehub does not recommend this program for any Canadians.”
- Mortgage comparison site Ratehub on the Liberals' First-Time Homebuyer Incentive
Laird is far less positive about the Liberals’ homebuyer incentive, as can be seen in a recent analysis that concludes, “Ratehub does not recommend this program for any Canadians.”
The program essentially means that borrowers will be on the hook for the government’s share whenever they sell their house, or at the end of the mortgage term, after 25 years, Laird said in an interview with HuffPost Canada.
“What I’m actually predicting is the government will have to write these things off, because I can’t picture them knocking on doors (of people whose mortgages have ended) and saying, ‘You owe us a hundred and sixty grand.’”
And as HuffPost reported before, Britain’s experience with a similar incentive for first-time homebuyers resulted in borrowers spending more than they otherwise would have on houses, resulting in higher house prices.
The experts are becoming increasingly convinced that Canada has a genuine, tangible housing shortage, spurred in part by faster population growth, and only building more housing can actually alleviate the problem.
In a report last week, Royal Bank of Canada estimated that Toronto needs to double the amount of rental housing it builds (condos and purpose-built rentals) in order to meet demand, or face continuing rising rents.
In a report issued Tuesday, the Bank of Montreal noted that Canada’s population grew by 531,500 in the past year. Percentage-wise that’s the fastest pace since 1990, and in raw number terms, it’s the most Canada’s population has ever grown in a year.
Most of that growth comes from immigrants, and immigrants are disproportionately renters. Yet most new urban housing units today are condos; hence recent data from the Canadian rental housing index showing that immigrants are three times as likely as other Canadians to experience overcrowding in housing.
Build more housing
So far, the NDP have been the only party whose policy announcements in this election campaign line up with what the experts say the problem is ― a lack of supply. They’ve announced a plan to build 500,000 affordable housing units over 10 years, starting with a $5-billion investment in the first 18 months.
They have also announced a new tax credit of up to $5,000 for low-income renters, expanding on the Canada housing benefit of up to $2,500 that the Liberals are planning to launch next year.
This would “make an immediate impact” on housing affordability for renters, Jill Atkey, CEO of the B.C. Non-Profit Housing Association, told HuffPost Canada last week.
Yet that, too, could lead to rising rental rates unless the benefit is accompanied by “strong rent controls to ensure it does not just lead to higher rents going to landlords,” the Canadian Centre for Policy Alternatives said in a recent analysis.
But rent controls could act against efforts to build more rental housing, by limiting how much money developers can expect to make, and therefore how much they can borrow to build.
Atkey wants to see federal and provincial governments expand their spending on subsidized housing, noting that the one province that has been “a bright spot” for affordability ― Quebec ― is also the one place that never stopped building subsidized housing.
“What we need is more coordination amongst (levels of government) and a deepening of the investments that they’ve already committed,” she said.
But how likely is that? In its report on Canada’s booming population, BMO senior economist Robert Kavcic noted that the boom “has provided significant support to housing demand, and is a major reason why we continue to see robust levels of construction activity.
“Vacancy rates across urban centres ... remain extremely low, while rent growth is strong. This has helped prolong the housing expansion.”
Exactly. Letting rental rates and house prices run out of control is good economic policy, at least in the short term, and especially so when the global economy seems to be slowing down.
After all, why mess with success?