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The Canadian government announced it will impose a 1-per-cent empty homes tax in 2022, rather than striking at the heart of the problem.DARRYL DYCK/The Canadian Press

Daniel Tsai teaches law, business and culture at the University of Toronto and marketplace law at Ryerson University.

Toronto is planning to introduce a new empty home tax for 2022, but this attempt to pressure owners to rent or sell their properties to increase housing supply will likely fail. Why? Governments are almost always too optimistic about the impact of their taxes, relying on them for political popularity, even if they have little effect.

For instance, the City of Vancouver estimated there were more than 10,000 empty homes, but the first report about the tax’s implementation in 2018 found it was only applied to only 2,538 units.

By 2019, Vancouver taxed 1,893 units, a drop of only 645 units over two years, in a market that needs 72,000 new homes to meet its demand over the next decade.

Vancouver also estimated the tax would increase the city’s rental vacancy rate, only to find a negligible increase.

This futility didn’t stop other governments from introducing empty-homes taxes.

B.C.’s NDP government introduced its own provincial measure, dubbed a speculation and vacancy tax, for Vancouver, Victoria and other urban areas in 2018 to stop allegedly rich foreign (read: Chinese) buyers from driving up house prices.

In 2019, B.C. generated only $88-million in from the levy, far below its predicted revenue of $185-million. In 2020, Vancouver housing prices increased 9 per cent instead of going down.

The Canadian government also announced it will impose a 1-per-cent empty homes tax in 2022, rather than striking at the heart of the problem: record lending, unprecedented demand and “cheap money” available to home buyers – with some lenders offering 0.99-per-cent interest rates on mortgages. Toronto alone usually gets 118,000 new immigrants per year, all of whom need housing. Ontario needs an estimated one million homes over the next decade.

The housing affordability crisis can be solved by creating a more level playing field between owners and prospective buyers and restricting the lending practices of banks. First, the federal government can reduce the irrational speculation among Canadians on increasing housing prices by reducing access to cheap money.

Rather than the Bank of Canada blindly raising interest rates, Canada should put in place stringent underwriting requirements and amortizations on loans for investors, non-residents, and speculators, but allow easier access to mortgages for first-time homebuyers. First-time buyers should face less onerous stress tests on qualifying for mortgages, such as allowing for a longer amortization period (up to 30 years) to reduce payments; the ability to have a co-signer on mortgages; and the use of insured high-ratio mortgages, in which the down payment is less than 20 per cent. Private lenders and credit unions should face the same federal rules and also be required to favour first-time buyers.

Second, the bidding process itself needs to be reworked so there is complete transparency. By adopting an “absolute auction” process, with a minimum and maximum reserve, the buyer would know immediately what the parameters of the bidding are, which would help reduce higher prices resulting from overbidding.

If competing bids for a home are coming from a Canadian resident and a non-resident, the bidding should favour the local buyer when all other sale conditions are the same. The bidding process could also require non-resident bidders have a significant commercial investment in the country (such as owning a business here and employing Canadians) or have strong personal ties to the country (such as a job) before they can purchase a home, so that the purpose of the residential purchase is for the home to be lived in by its owner.

Third, through better government policies, Canada can make it favourable to rent, with renters paying less income tax than homeowners as an incentive and substitute for home ownership, as is the case in countries such as Switzerland. Switzerland makes rent partly tax deductible for renters, subsidizes rent, and landlords can get government subsidies as an incentive to rent their properties. Canadians have a 68-per-cent home ownership rate, whereas European countries with favourable tax policies for renters, such as Switzerland and Germany, have a 30- to 40-per-cent ownership rate.

A balanced tax system that makes renting favourable would help reduce the pressure towards ownership and speculation in Canada and the United States. Instead of symbolic and ineffective taxes, only effective and targeted underwriting practices, fair bidding processes, and a tax system that makes renting a substitute for owning a home will help address our housing crisis.

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