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Canada Needs House Prices To Drop. Here's How To Make It Happen.

Affordability in Toronto is the worst since the 1990 housing bubble. In Vancouver, it just hit the worst level ever recorded anywhere in Canada. It's time to admit it's not enough to slow house prices -- they have to come down.

Canada's federal Liberals are stuck between a rock and a hard place, and they know it.

With home affordability rapidly deteriorating in Ontario and British Columbia, the public wants action on soaring house prices. On the other hand, outside those two hot provinces, house prices in Canada are falling, on average.

This is a serious policy conundrum, as Prime Minister Justin Trudeau has himself noted: How do you cool off two Canadian housing markets without tanking the ones that are already struggling?

Fortunately, there are options to cool off only the problematic parts of the housing market -- options that, hopefully, Finance Minister Bill Morneau's newly announced working group on housing will consider.

But meaningful action will require political courage, and the first act of courage is to admit that house prices in Toronto and Vancouver don't just need to slow down -- they need to come down.

Affordability in Toronto is the worst it's been since the 1990 housing bubble. Vancouver just became the most unaffordable housing market ever recorded in Canada. Short of everyone getting a huge raise, the only way to bring affordability back in line in a reasonable amount of time is for prices to come down.

So how much would a correction have to be? Large. Moody's Investor Service recently entertained a scenario in which Ontario and B.C. house prices fall by 35 per cent, calling it a "severe stress scenario."

But would that really be so "severe"? A 35-per-cent decline would bring Vancouver prices back to last year's levels, and Toronto prices to 2014 levels. It's hard to believe that financial apocalypse will follow if we have last year's house prices next year.

Simply put, a planned, policy-driven house price correction is what's needed. Here are some things government could do to address housing affordability. But first, one thing Trudeau and other policymakers should not do.

No more punishing new homebuyers

After so many rounds of mortgage-rule tightening, under the previous Conservatives and the current Liberals, house-price growth isn't cooling; it's been accelerating in the hottest markets.

The conclusion is inevitable at this point: tightening mortgage rules doesn't work in these circumstances. In fact, we may simply be punishing new homebuyers by making it harder for them to buy a home.

It's time to leave mortgage payers alone, and focus on the other elements that have been driving up prices.

A punishing tax on house-flippers

Evidence is growing that house-flipping -- investors buying houses and quickly selling them at a much higher price -- has become a major problem in Toronto and Vancouver. House-flipping drives up prices. It's artificial "demand" for housing that disappears not when prices fall, but when prices don't grow fast enough, thus setting up the market for a crash.

The solution? Stop flipping before it gets any worse. Implement a sales tax on homes sold within one or two years of the last time they changed hands, an idea CIBC recently floated. That should remove the flippers before they distort the market any further.

'Freeze' the foreign homebuyer market in place

Vancouver is moving towards a vacant home tax to discourage foreigners from parking their cash in the city's real estate and then leaving the properties untended.

It's unlikely to be enough. China's millionaire population is doubling every few years, and will be larger than the entire population of Greater Vancouver within four years. The foreign influx could get much more intense.

So let's institute a freeze on the existing foreign-owned housing market. Houses owned by foreigners could continue to be owned by foreigners, and those houses would be "grandfathered" so that they could be sold on to other foreigners as well. But for all homes in Canadian hands, and all future homes, there would be a requirement that the buyer is a Canadian citizen.

In essence, this would create a separate housing market for the world's rich. Canadian cities could still continue to attract wealthy investors from around the world. Realtors would still make big commissions from sales to the jet-set crowd, and governments would still collect big land transfer taxes.

But the rest of us could buy homes in a saner housing market that hasn't been turned into a casino for the world's rich, or a place to hide wealth from the Chinese government.

A property tax surcharge for foreign buyers

Let's milk those rich Chinese nationals who are hiding income from their government by sinking it into Canadian real estate. They can obviously afford it, are unlikely to be deterred by a property tax hike, and could take the pressure off other taxpayers.

This is what Sydney, Australia, is planning to do. The city is facing a similar influx of foreign property buyers to what Vancouver is experiencing, and is planning to cool things off by raising property taxes for foreigners to four percentage points higher than what locals pay.

Loosen unreasonable limits on where you can build

The Greenbelt surrounding Toronto is a worthwhile idea: It limits the loss of valuable farmland to suburban sprawl and encourages sustainable, high-density development.

But because of the Greenbelt and other restrictive land-use policies, construction of detached homes has collapsed to nearly nothing. Desperate homebuyers are driving up the prices of the existing supply, pushing up prices for all housing types.

As some academics are starting to say, it's time to get real about the Greenbelt. Greater Toronto is one of North America's fastest-growing cities, and it needs room to grow. The region's population is forecast to hit 9.1 million people in the next 20 years, from around 6.8 million today. You are not going to fit that into condos along the lakeshore.

Toronto needs a better balance between environmental priorities and growth priorities, if it's going to have affordable housing in the generations to come.

New trains, new roads

Trudeau's Liberals have already embarked on a massive program of infrastructure building, so why not orient some of that towards building things that could help make housing more affordable?

Put billions towards expanding Greater Toronto's GO train and bus network, allowing people to travel from farther away to access jobs in the city. Then do the same with Metro Vancouver's SkyTrain network and the West Coast Express.

And, though urban planners seem to hate the idea these days, build roads. Cars aren't going away, even if they do go electric and driverless, and reducing gridlock is one obvious way to make more distant areas accessible from the city.

The solutions to Canada's home-affordability crisis are all there. It's just a question of whether our political leaders are willing to take the initiative.

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