Paul Kershaw is a policy professor in the UBC School of Population Health, and founder of Generation Squeeze.
On Tuesday the federal government unveiled their budget for 2019. As was expected, it included a plan to address housing affordability. While the plan shows some promise, more work is required to help the many Canadians – especially young people – who find themselves in a financial squeeze when trying to buy a home.
Real estate boards pressed Ottawa to relax mortgage stress tests in this year’s budget because sales are no longer at record highs. The Liberal government bravely resisted. Relaxing stress tests would have encouraged younger people to borrow more than they should, and inflate demand. Not only would many end up paying more for housing, they would postpone opportunities to recouple home prices to young people’s earnings.
Last year gave a taste of what restoring affordability actually looks like. Average Canadian home prices fell from above half-a-million dollars to $489,000. First-time home buyers regained an entire year of full-time work from this drop, as the work required for saving a 20 per cent down payment on average-priced homes dipped from 14 years to 13. (Alas, 13 is way more than five years, which was the average required when my mom started in the housing market).
The tough pill we must now swallow is that housing becomes more affordable only when home prices stall by comparison with earnings. The 2019 budget swallows some of this medicine, even though it’s an election year.
Rather than relax mortgage qualification rules, Ottawa adjusted the Home Buyers’ Plan. First-time home buyers can now allocate $35,000 from their RRSPs toward a down payment – up from the previous $25,000 limit. By sheltering another $10,000 of down payment money from taxation, some buyers will enjoy a larger subsidy. But many young people won’t yet have enough in their RRSPs to take advantage of this pre-election gesture.
More interesting is Ottawa’s new plan to scale up “shared equity” loans. The Canada Mortgage and Housing Corporation (CMHC) now has funds to invest in homes with first-time home buyers. For households with income below $120,000, CMHC will kick in between 5 per cent and 10 per cent of a home’s price. This reduces the mortgage and borrowing costs required by first-time buyers. CMHC gains a stake in the home, which it collects at resale.
Although CMHC must still flesh out details, the shared equity plan is more likely to help some first-time buyers than blunt revisions to mortgage stress tests. It also moves CMHC into a novel position of building public equity in the private housing market. Still, we must monitor the degree to which this co-investment strategy may reinflate home prices in ways that compromise affordability.
Since average home prices are eight times higher than young people’s typical earnings (up from four times in 1976), Ottawa aims to incentivize the construction of purpose-built rental homes in anticipation that younger Canadians will rent more. To do so, the budget promises favourable borrowing rates for developers if they build rental. Developers had wanted GST exempted from rental construction, so it is unclear how many will respond to this alternative subsidy.
While it was brave to stand firm on mortgage stress tests, more bravery is required in Ottawa, starting with a bold housing goal.
Every federal political party should adopt CMHC’s goal that all residents be able to afford suitable housing by 2030. This will require policy-makers to be guided by the idea that housing is for homes, not for top performing investments in our portfolios. Home prices will only be in reach for future generations if we no longer tolerate them growing faster than local earnings.
This requires a shift by raising taxes on unhealthy home values to slow down prices, and pay for tax cuts on regular incomes. Tax cuts should be targeted to renters and young people who have not benefited from skyrocketing home prices.
Ottawa should also incentivize bigger cities to end the inefficient use of residential land that results from zoning for low density. It wouldn’t cost Ottawa anything to link its housing and transit investments to municipal density targets. But this linkage would give mayors political cover to approve density in the face of NIMBYism, because doing so would be required for their city to receive the largest share of federal transfers.
Finally, Canada won’t meet CMHC’s affordability goal in 2030 unless home prices fall and/or young people’s incomes grow at rates we haven’t seen for decades.
Since neither trend is likely, we need federal parties to search for other policy options to reduce rent-sized costs in young people’s lives. Child care and parental leave are prime options. If these weren’t rent-sized payments, younger Canadians could better manage with modest, rather than dramatic, drops in home prices. This would protect home equity for those who bought into the market earlier, including our aging population.