The Hub’s second annual Hunter Prize for Public Policy, generously supported by the Hunter Family Foundation, focused on solving Canada’s housing affordability crisis. A diverse group of ten finalists have been chosen from nearly 300 entries, with the finalists and winners chosen by an esteemed panel of judges, including Amanda Lang, Ben Rabidoux, and Mike Moffatt. The Hub is pleased to run essays from each finalist this week that lay out their plans to help solve this persistent policy problem.
Imagine that you are a prospective first-time homebuyer, armed with a modest mortgage pre-approval. You go shopping for a modest home, perhaps a condo in Vancouver. You find the perfect home and decide to put in an offer.
Days go by without hearing back from the seller. You decide to check in with them, only to be told that you were outbid by an investor who swooped in with an all-cash offer and bid above the asking price. You feel demoralized and deflated; this was your perfect starter home, but you couldn’t even hope to compete with deep-pocketed investors.
Today, this is a scenario that repeats itself many times across Canada.
The housing crisis in Canada has been dissected ad nauseam. Once mostly confined to British Columbia and Ontario, it has metastasized to most of the country and even rural areas. At this point, the factors that led to this scenario are well-known. A significant deficit in housing supply, an unexpected population boom, skyrocketing taxes and fees on new construction, and archaic zoning laws are all factors that critics point to for the deterioration of the housing sector. But the national discussion is leaving out one major cause: the financialization of housing.
The financialization of housing is the process where investors, backed with access to large amounts of capital and favourable financing terms, use homes as a vehicle for profit instead of using them as a place to live in. At heart, this is fundamentally a cultural issue; Canadians are simply addicted to investing in real estate. The youths and entrepreneurs of the day are directed to invest in unproductive real estate assets instead of starting businesses that will drive innovation, employ individuals, and pay taxes that can be reinvested into hospitals, schools, and transit.
StatsCanada estimates that today, one in five homes in Canada are investor owned. In British Columbia and Ontario, these figures rise to 37 percent and 41 percent respectively of condominiums that are owned by investors. This is problematic because condominiums make up nearly four in five of new home construction in both B.C. and Ontario. This shuts first-time homebuyers out of the market and raises prices by inducing scarcity. How did we get here?
In the 1980s, federal and provincial governments were struggling with overstretched balance sheets and had to make difficult decisions on where to cut back. Unfortunately, the housing sector was one of them. We once spent billions of dollars annually on public housing in the late 1900s, but today that figure is but a fraction of what it once was, which means that the private sector is now entirely responsible for delivering housing. This wouldn’t be such a bad thing if all orders of government hadn’t failed in managing the housing sector, which was kept in check by public housing. The lack of net new public housing units has only served to strengthen the hand of investors.
After the post-Second World War housing boom in the mid-1900s, municipalities all over Canada engaged in the Faustian bargain that enabled density in downtown cores while restricting zoning to vast swathes of single-family residential in the suburbs. This inefficient land use has manifested in a housing supply shortage that only serves to strengthen the hand of investors.
While we can rezone cities, decrease population growth, and improve building conditions, the housing supply deficit will persist because investors will always have the ability to buy up new supply at a rate that disadvantages normal buyers who do not operate on the same playing field. Therefore, their influence must be dampened in order to return the housing sector to balance.
The crux of the problem is that it is too easy to invest in real estate as opposed to investing in a business or other productive endeavours. This is deeply embedded in Canada’s culture and will take a significant amount of political courage to recalibrate. The answer to this lies in Canada’s tax structure.
Taxes can be used as a tool to either encourage or deter certain activities in the economy. Take carbon pricing for example. Adding a cost to emissions will incentivize emitters to innovate in order to drive down emissions and avoid the cost of pollution. The same principle can be applied to housing, in respect of the capital gains tax.
When Prime Minister Justin Trudeau presented the 2024 federal budget, he described it as “fairness for each generation.” A key detail in the budget was the change in the capital gains tax to hike the inclusion rate to 66 percent from 50 percent. While the idea of reforming the capital gains tax was poorly executed, it must be said that this is the best tool in our toolbox for solving the dual problems of investor activity in the housing market and falling productivity and investment in Canada. Consider the following capital gains tax changes:
- A change in the inclusion rate to 100 percent and a flat rate of 30 percent for taxable income under the umbrella of the capital gains tax, and;
- A carveout for residential properties that includes an escalator clause that would hike the capital gains tax applied to each residential property, starting at the third property owned and rising to a maximum of 80 percent.
The first point will manifest in a tax cut compared to the current capital gains tax, which will stimulate economic activity and reward individuals for the risk incurred in starting a business or investing in one. The second point will severely penalize those who engage in asset-trading activity in the housing market and ensure that capital flows to productive assets, not unproductive assets such as real estate.
Reducing the influence of investors in Canada’s housing market must happen for Canada’s dual productivity and housing crises to improve. More importantly, it will require courageous politicians who don’t simply tinker at the margins with meaningless policies that don’t change anything. Canada needs substantial change to ensure that homes are for people, not for profit. And that starts with reforming our antiquated, inefficient tax code.
