The only way young buyers will afford houses is if current owners give up some of their gains

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If home ownership is as important as everyone says it is, we should really do something about how expensive it is for young buyers to get into the market.

Targeted help for first-time buyers would only inflate the market further, so that’s out. Building more houses to satisfy demand might help level off price gains, but it’s a long-term solution that leaves plenty of time for prices to soar from current levels. For quick action, we need to address the frenetic demand for houses today.

You okay with that, current home owners? Because there’s no way to address runaway price increases in major cities without measures that would cost you in some way. Making it harder to get a mortgage could cause prices to fall in your area and reduce some of your recent equity gains. Changes to the capital gains tax exemption on the sale of a principal residence could reduce your net gain when you sell.

It’s a sign of how overamped our housing market is that stern measures such as these are being discussed. But those are the types of policy changes needed to cool the market and restrain prices, giving younger buyers a better shot at home ownership even if such changes would affect them as well. Young buyers would be hurt by making mortgages harder to qualify for, but affordability improves if prices ease. And while the ability to sell a principal residence tax-free is attractive to everyone, introducing a cap on tax-free gains would undercut the idea that houses are investments worth pursuing at any cost.

Doing nothing with housing will just make current owners richer and slam the door on more would-be urban buyers. Only so many can move to smaller communities and, anyway, you have to wonder how long residents of these towns will welcome all the new money flowing in and sending home prices higher.

There’s a sense of entitlement about housing in this country that complicates efforts to improve affordability. Owners feel entitled to tax-free capital gains on the sale of a principal residence and strong year-by-year price appreciation that juices their equity. The real estate industry feels entitled to a continuation of the gold rush conditions in housing over the past 12 years or so.

We could do nothing on affordability and let the market sort things out over time. Rising mortgage rates in the next year or so might dampen demand, but there’s going to be upward pressure as well from a postpandemic restart to immigration and households accessing the piles of cash saved in the past year.

If you’re a true believer in the greatness of home ownership, you have to be worried that too many young adults are being permanently priced out right now. This is a much different market than the one boomers and Gen Xers bought into in their 20s and 30s.

In 1992, when my wife and I bought our first house in Toronto, the average resale price in the city was about $203,000 and a 10-per-cent down payment would have amounted to $20,300.

Adjust those numbers for inflation and you get an average house price of $338,495 today and a 10-per-cent down payment of $33,850 or so. Last month, after a year-over-year jump of 15 per cent, the actual average price of a home in Toronto was $1-million.

Boomers faced a significant obstacle in their day: high interest rates. Posted mortgage rates were in the 9-per-cent range through 1992 and peaked at close to 20 per cent in 1982. But the monthly payments on a 9-per-cent five-year fixed rate mortgage for a $203,000 house bought with a 10-per-cent down payment is $1,560. A $1-million house bought with a 2-per-cent mortgage and a 20-per-cent down payment (that’s the minimum on houses costing $1-million or more) would be $3,388 a month. Paycheques haven’t increased nearly enough to paper over this jump in payments.

Houses have never just dropped into the waiting hands of first-time buyers – every generation has to work hard to save a down payment and then carry a mortgage and other costs of living. But we have reached next-level unaffordability in several cities and other locations are moving in that direction.

There are a few options to consider for what comes next. One is to leave housing alone and accept that more rapid price acceleration will increase the risk of a crash and, meantime, turn urban houses into a luxury item for the affluent. Or we rein things in with some measures that improve affordability at the expense of current owners.

If home ownership is the virtue so many Canadians believe it to be, then taking a hit to let the younger generation in seems a patriotic thing to do.

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