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Mike Moffatt and Cara Stern: The dream of Canadian homeownership is dying. Here’s how to revive it

Commentary

If you want a well-functioning economy, people must have hope that hard work will lead to success. But in Canada, people are giving up. A recent poll by Abacus found that a full 74 percent of Canadians believe housing affordability will get worse for first-time homebuyers in 2024 and that 57 percent of non-homeowners are either pretty pessimistic or have given up hope entirely of ever being able to buy a home. That’s up from 48 percent since September 2023. 

Locking young people out of home ownership is bad for the political fortunes of incumbent governments and bad for the economy. It is also a threat to the social stability of Canada, according to a recent RCMP report. Therefore, all orders of governments need to restore the dream of homeownership to Millennials and Generation Z, while creating abundant options for renters.

Additional housing supply for both owners and renters is necessary. But building new supply will take time. Governments cannot expect people to feel good about the measures taken to increase housing supply if they’re living in unsuitable spaces, with only the promise that supply may restore affordability in a decade or more. Canadians need solutions now, so the government needs to find ways to get existing homes into the hands of first-time homebuyers. 

We believe it’s possible to attack the demand side of the equation to get first-time homebuyers into homes sooner. This goal can be accomplished through a three-part plan of scaling back international student enrollment, creating incentives for investors to return single-family homes to the ownership market, and making it easier for first-time homebuyers to qualify for mortgages. The key is that all of these reforms must be implemented together for it to have an effect.

Getting more single-family homes back into the hands of families

The only immediate way to increase homeownership for younger families is to make it easier for them to buy homes that already exist or are about to be completed. In Ontario alone, there are nearly 700,000 single-detached, semi-detached, and row homes that are not occupied by their owners but are serving some other purpose. 

While homes being left unoccupied or turned into short-term rentals receive a great deal of attention, the majority of these investor-owned homes are being used as long-term rentals, often for university and college students. With the international student boom, entire neighbourhoods are getting converted into student rentals. These conversions reduce the number of homes available for families but also cause inefficient use of existing infrastructure. It leaves local elementary schools underused because these neighbourhoods then lack children.

International students and other non-permanent residents add to the social, cultural, and economic fabric of Canada. However, for them to thrive, they must have adequate housing. Canada’s international students and temporary foreign workers programs need to be scaled back even more until Canada’s non-permanent resident population returns to pre-pandemic levels. The scale of the international student program, in particular, should be tied to the construction of on-campus or near-campus housing. This could help prevent the loss of single-family neighbourhoods in our cities.

Governments should then create incentives for the current owners of those student rentals to return them to the market to be used as homes for actual families. A time-limited and temporary reduction in capital gains tax or provincial land-transfer taxes when selling a secondary property could act as such an incentive. For example, the capital gains inclusion rate could be lowered for any single-family home or condo unit purchased before January 1, 2024, so long as that unit is sold to a buyer using it as a primary residence, and the sale is completed between July 1, 2024, and July 1, 2027. This measure would incentivize investors to return those units to the ownership market. Over the longer term, the tax system should be designed to disincentivize investors (from mom-and-pop investors to large domestic and foreign corporations) from buying up existing single-family homes and instead incentivizing them to provide capital only to new home construction (rental and ownership).

While having investors sell their portfolio of single-family homes will increase the supply of homes available for purchase and put downward pressure on prices, it will still likely not be enough to allow first-time buyers to purchase these homes. Last year, home sales dropped by 11 percent due in part to high prices and interest rates, causing first-time homebuyers and young families to be unable to qualify for a mortgage at all. The drop in sales can be addressed by recognizing that the current rules could be better designed for younger homebuyers. 

For example, the current 25-year amortization rule helps ensure homebuyers will not still be paying off their mortgages when they are in their 80s or 90s. However, these rules do not take into account the age of the buyer and treat a 50-year-old and a 30-year-old the same. Because younger buyers have more time left in their working careers, they should be allowed to choose longer amortizations if they wish. A 35-year-old buyer with a 30-year amortization would still have their mortgage paid off before retirement. The federal government could create an amortization length of 30 years, but only for first-time homebuyers of primary residences. Ideally, this would only apply if one of the buyers is under 40 years old. It could even introduce 35-year amortizations for buyers under age 35. The reform would allow more young families to qualify for a mortgage and give an advantage to first-time homebuyers when they are competing with investors and older buyers for a home.

A real estate agent puts up a “sold” sign in front of a house in Toronto, April 20, 2010. Darren Calabrese/The Canadian Press.

Finally, the current stress test rules are not particularly well-designed for young professionals. The stress test is an important tool to ensure that homebuyers can continue making payments if interest rates go up or if economic circumstances change. However, the current test may be excessive for young professionals, who are likely to be earning more five years from now than they are today. Canada should consider reducing the stress test rate from 200 basis points to 50 basis points, but only for first-time homebuyers of primary residences. Or, for buyers under 40 (and the home will be used as a primary residence), who choose a fixed-rate mortgage of five years or more. As with the amortization changes, it would allow more families to qualify for a mortgage, while giving an advantage to families over investors.

It is critical that these ideas be implemented together. Policies designed to increase homeownership that do not take into account the rental market risk displacing renters. A program in the Netherlands that banned investor ownership of some housing types did manage to increase first-time ownership. But it also led to increases in rents, as lower-income renters were displaced by middle-income families. It left more renters chasing fewer rental properties. A plan to scale back international student enrollment until sufficient on-campus and near-campus housing can be built would help minimize this effect, ensuring rents do not skyrocket as rental housing is converted into ownership housing.

Governments cannot afford to wait for new supply to come onto the market to address the dying dream of homeownership in this country. Canadians cannot afford to wait that long. Demand-side policies must be a part of every government’s toolbox in 2024.

Steven Globerman: Canadian policymakers should increase free trade at home as protectionism clouds gather

Commentary

The Republican primary is over—not surprisingly, Donald Trump will be the party’s candidate in the presidential election in November. A second Trump presidency, which would likely mean more protectionism by the United States, would be bad news for Canada. Indeed, if elected, Trump has promised to impose an across-the-board 10 percent tariff on all manufactured goods exported to the U.S.

At the same time, Trump’s prospective Democratic opponent, President Joe Biden, has also embraced “America First” trade policies including the provision of massive federal subsidies to encourage domestic investment in several industries including electric vehicles, semiconductor chips, and transportation and clean energy infrastructure. Biden’s strong support for unionized U.S. workers further signals that a second Biden term would pose a serious threat to Canada, as the U.S. is by far the largest foreign buyer of Canadian exports.

The Trudeau government is clearly aware of the threats posed to the bilateral trade relationship, and Canadian diplomats have mobilized to generate support for the Canada-U.S.-Mexico Trade Agreement among state and local politicians and business and labour leaders in the U.S. The agreement is scheduled for a tripartite review in 2026 and U.S. officials may balk at renewing the agreement, especially under a Trump presidency.

The Trudeau government has also sought trade diversification to reduce reliance on the U.S. through initiatives such as the Indo-Pacific Trade Strategy. However, the physical distance between Canadian-based exporters and potential customers in Asia creates higher transportation costs and logistical difficulties compared to doing business in North America. Political tensions between Canada and the governments of China and India, the two largest potential markets for Canadian exports in the region, further diminish the prospects for significant trade diversification.

So, faced with the spectre of more trade hostility from the U.S. and the inherent challenges to trade overseas, what should Canadian policymakers do?

In short, make trade easier here at home. Specifically, reduce barriers to trade, investment, and labour mobility between the provinces and territories by broadening and deepening the existing Canada Free Trade Agreement (CFTA). The CFTA, which came into effect in 2017 and was updated in 2023 with the cooperation of all 13 provinces and territories and the federal government, aims to reduce or eliminate barriers to the free movement of people, goods, services, and investment within Canada.

For example, provinces could eliminate provincial marketing boards, which prevent free trade in specific food items (e.g. poultry products) and dismantle government monopolies at the wholesale level for beer and wine, which effectively protect local breweries and wineries from competition. Provinces could also streamline certification standards for various occupations, making it easier for workers to move around the country. And address diverging financial and securities regulations, which discourage interprovincial commerce across a range of industries.

Danielle Smith, centre, Premier of Alberta; Ranj Pillai, left, Premier of Yukon; and Dennis King, Premier of Prince Edward Island, look on during a press conference at the meeting of the Council of the Federation, where Canada’s provincial and territorial leaders meet, in Halifax, Monday, Nov. 6, 2023. Kelly Clark/The Canadian Press.

In other words, within the CFTA, embed a policy of “mutual recognition,” which would mean that any item of commerce that meets the regulatory requirements of one provincial or territorial government will automatically satisfy the requirements of another provincial or territorial government. Implementing a policy of mutual recognition would effectively oblige individual provinces and territories to drop existing exceptions to provisions of the CFTA (for example, supply management of dairy products, which limits imports to keep prices artificially high). In this regard, the Atlantic provinces currently maintain the greatest number of exceptions. However, Atlantic Canadians would also experience the greatest increase in per-person income levels if trade within Canada became more free. Indeed, if policymakers increase free trade, Canada’s productivity will rise, which in turn will increase the living standards of Canadian workers across the country.

There are obvious political challenges to a more integrated domestic market including a reluctance on the part of provincial governments to eliminate monopolies, such as Ontario’s LCBO, which generates significant government revenue, and lobbying by interest groups to maintain regulations that protect their financial interests. But the federal government should show leadership to surmount these challenges, especially given the uncertain future of trade policy south of the border and around the world.