Yahoo Finance Jack Mintz: Unaffordability policies are the real problem in housing
Ronald Reagan had it right: the nine most terrifying words in the English language are “I’m from the government and I’m here to help.” Not to rain on anyone’s parade but many housing measures currently pursued by federal, provincial and municipal governments are either Band-Aids for what is actually a festering wound or policies, like rent controls and “empty-home taxes,” that reduce the supply of housing even more. If governments would simply get out of the way, chances are the market would settle down quickly.
The economics of rising housing prices is simple. If demand for housing increases or supply falls, the resulting temporary excess demand causes purchasers to bid up prices until the market balances. Similarly, if demand falls or supply increases, excess supply pressures sellers to reduce prices to make a deal.
Another economic lesson is that people will move to the suburbs if they value housing size more than the time and expense they incur commuting to work. Similarly, people will put up with 800-square foot condos if they put greater value on being close to work and entertainment than having space. So it’s no surprise that house prices and rental rates are higher near city centres and lower in the suburbs and outlying towns.
Though builders want to respond to higher prices with more construction, governments may make construction difficult. Low interest rates since 2009 and monetary expansion during the pandemic made housing more expensive. Higher interest rates to curb inflation have reduced residential investment (by $1 billion in 2022, to be exact).
The regulations that affect housing prices most are those that limit land availability when a city continues to grow. Greenbelts, which even the U.K.’s leftish Guardian newspaper now questions, restrict city expansion and force up land prices. In such cases, markets respond by building smaller houses or taller, denser multi-unit housing. Zoning restrictions also constrain supply, though in some provinces they’re being loosened in favour of further “densification.” But putting more people into smaller units in taller structures frustrates families wanting more space. Densification is also opposed by neighbours concerned with traffic congestion and stresses on infrastructure, including schools and hospitals.
Real estate experts I’ve talked to do expect rents and home prices to keep rising in markets where population has been surging, and for that to lead to new construction. The key to restraining prices, they emphasize, is to make more land available. To some extent this will happen anyway. With permanent hybrid work-at-home arrangements — now almost two days a week — more people will live farther from city centres in suburbs and small towns with larger, cheaper homes. In other words, the market will work.
The very worst policies are rent controls, originally adopted with price and wage controls in the 1970s. They kill the incentive to construct new — or improve old — rental housing. On the demand side, a policy to nearly double international immigration is a major factor behind the recent housing price surge in large cities. Federal Minister of Housing Sean Fraser is right that we need to think about curtailing immigration — maybe of international students, though the high tuition they pay fills the coffers of colleges and universities. We should be smart about bringing immigrants to Canada and focus on key worker shortages, including the building trades and health care.
Policies aimed at reducing construction costs can backfire. The proposed 100 per cent GST rebate (rather than the existing 36 per cent) on new rental apartment and student housing is a band-aid solution: any construction it encourages will push up land prices more. Nor will it help in the owner-occupied market that so many young people are being shut out of. Like other GST rebates and exemptions, housing rebates benefit both people struggling with high living costs but also those well able to afford expensive multi-residential housing.
Then there are ineffective policies that ultimately discourage new construction. The “empty-home taxes” (EHT) that new Mayor Olivia Chow wants to triple in Toronto are a case in point. Defining “vacancy” as using a secondary home for less than six months a year is a problem: it could apply to vacation homes, to land held in inventory for development or to properties owned by long-distance commuters. Imposing a three per cent tax on such “vacancies” when interest rates are already discouraging holding empty property will force some people to sell their second home — quite possibly to renters who are close relatives. Worse still, in the longer term, the EHT increases the cost of developing rental housing, which risks being vacant itself from time to time. In Vancouver, the EHT has hardly made a dent in rental vacancy rates as development increasingly shifts away from residential housing.
As a homeowner, I love government policies that restrict supply and boost demand since they add to my wealth. But for those struggling with high rents and house prices, governments that make things worse are, as Reagan said, no help at all.
Financial Post
