The growing wealth gap between homeowners and renters is an issue that the Canadian Mortgage Housing Corporation (CMHC) is striving to solve, especially with the economic impacts from COVID-19 widening the divide. For the organization, that means tackling the country’s obsession with homeownership and promoting alternatives.
Even before the pandemic, Canada’s compulsion towards homeownership worsened housing affordability for young renters and kept values high for owners.
“The problem is promoting home ownership for its own sake, is just inflationary to pricing,” Evan Siddall, the CEO of the CMHC told Yahoo Finance Canada. “We spend a lot of time as a group trying to figure out with our legislation how we could reconcile these things and that was the core idea behind CMHC.”
For younger Canadians who have managed to purchase their first home in recent years, the CMHC is warning about the current risks in the housing market. In its forecasts, the organization warned that house prices could fall between nine and 18 per cent over the next 12 months, which Siddall says would put young first-time home buyers at a disadvantage.
“When the value of one asset outpaces the economic production of an economy, at some point, it has to end,” Siddall said, “The dream will become a nightmare.”
The right policy response to level the playing field between renters and home owners and limit the run-up in housing prices, Siddall argues, is to promote renting as a viable option. Soaring rents in Canada’s major cities have left many renters with less to save at the end of every month. Siddall argues that the organization has taken steps over the past few years by extending loans to create more purpose-built rental supply to provide more affordable options.
“We have to increase the supply of rental housing to make sure that rent levels and vacancy rates stay at levels that people can afford to live and maybe save a little money,” he said. He argues that the wrong policy response would be to continue fuelling the housing market so that prices have further to fall.
“The problem is that we're in a game of musical chairs and when the music stops playing, it'll be young first-time homebuyers who are holding the bag.”
Mind the wealth gap
One other potential solution entering the wealth gap conversation has been wealth and capital gains taxes on principal residences, which arose when the CMHC contradicted a report that it is allocating $250,000 in funding to home equity tax research. It raised eyebrows among real estate and policy analysts until CMHC clarified that the research initiative called Solutions Lab, a project in partnership with Generation Squeeze and the University of British Columbia (UBC), would explore a wide range of wealth, housing and inequality issues.
Backing away from capital gains and home wealth research altogether drew criticism from real estate analyst John Pasalis, the founder and CEO of Realosophy. Pasalis says the wealth gaps created by housing are valid concerns, especially with rapid price growth exacerbating the issue.
“I think it's terrible that CMHC is going so far out of their way to distance themselves from policies that aim to bridge the wealth gap between owners and renters,” Pasalis wrote in a recent tweet. “We need policymakers who consider the interests of renters rather than only prioritizing home-ownership.”
In an interview, Pasalis told Yahoo Finance Canada, “The fundamental problem of the millennial generation is these wealth gaps,” he explained.
“As a home owner, I have these massive, massive tax subsidies - one is the capital gain on my home which is 100 per cent tax-free. The other is the imputed rents, which is a massive component of GDP, which is a tax-free benefit.”
While Pasalis acknowledges that there’s no silver bullet solution to this issue and supports the CMHC’s purpose-built rental development to make housing more affordable, he says renters should be paying proportionately lower taxes than homeowners to address these wealth gaps.
“It could come in the form of higher taxes [for homeowners], but it could also come in the form of lower taxes for renters.”
The economic impacts of COVID-19 could widen these gaps, with the 5.5 million job losses impacting accommodation and food service sectors as well as wholesale and retail trade the most between March and April, according to Statistics Canada. An RBC Economics report in May found that these losses disproportionately affect renters.
“The job layoffs, reductions in work hours and wage cuts that have since ensued, predominantly affect a group of workers who most often live in rented accommodations,” the report said.
Disparities like these are reasons why Eric Swanson, executive director of Generation Squeeze, is pushing for a post COVID-19 “return to something that was better than normal, because normal wasn't working very well for a lot of people in Canada.”
The ‘normal’ Swanson is referring to was the run-up in housing prices and tax-free profit that prompted a rush of ‘toxic demand’, such as speculation.
“We can't make homeownership profitable and make housing affordable at the same time,” Swanson explained, “I think those two things are mutually exclusive they pull in opposite directions.”
The national wealth breakdown reveals the country’s dependence on real estate assets. By Q3 2018, real estate wealth of $8.75 trillion took up 76 per cent of the total $11.42 trillion national wealth. House prices have been on the rise in over the past few years, with the actual national average reaching almost $539,000 in June 2020, giving home-owning households more capital gain and opportunities to extract further funding from homes through a home equity line of credit (HELOC) or a reverse mortgage for older Canadians.
The growing wealth inequality in housing and the Canadian goal towards housing security was a concern Siddall expressed in a 2018 speech, and it’s one he continues to hold in the age of COVID-19. What concerned Siddall was the over-leveraged household with negative equity that purchased their home on the idea that homeownership was the sole path to building wealth, potentially leading them to be worse off.
“All that’s doing is increasing the demand for housing, increasing prices… As long as prices go up, it works,” Siddall said, “This game doesn’t work when prices go down.”