COVID-19 has produced any number of weird outcomes, from conservatives advocating for a basic income to a failing video game retailer briefly becoming the most talked-about company in the world. But maybe the weirdest of all has been the U-turn in Canada’s housing market, which recovered from some weakness in early 2020 to post a rally that caught almost everyone off-guard — and has raised some difficult questions for policy-makers across the country.
Last May, in the face of data that showed resales falling by 57 per cent and the average price of Canadian homes plunging by 10 per cent, the Canada Mortgage and Housing Corporation released a forecast suggesting prices could drop by nearly 20 per cent in its worst-case scenario. Instead, they’ve rallied more than 20 per cent in places like Vancouver and Toronto, where the price of the average home — including condos — just crested the $1-million mark. Meanwhile, a house that was listed in east Vancouver for $1.72 million went for $872,134 over asking after nine days on the market.
This might seem like a good news story, and for Canada’s homeowners — especially the ones in major markets like Vancouver and Toronto — it clearly is. But while we’ve averted one economic disaster, we may be inviting another down the road. Housing now makes up nearly 10 per cent of Canada’s GDP, which is approximately 50 per cent higher than our historical average and twice that of the United States.
“To say ‘that’s an all-time high’ would be an understatement,” BMO chief economist Douglas Porter wrote in a recent note.
The danger here isn’t just that Canadians are taking on even more debt than before and putting themselves directly in the line of fire if interest rates have to rise in response to a surge of post-COVID inflation. It’s also that all of these dollars flowing into housing are being drawn away from other opportunities and sectors.
As economist Kevin Carmichael wrote back in January, “the world is in the midst of a transformative shift to a digital and carbon-neutral economy, a once-in-a-lifetime investing opportunity, and where are Canadians placing their bets? Houses, for the most part.”
And while those bets may be paying off for Canadians on an individual level, in the aggregate, they could prove disastrous for the country as a whole. “An exuberant housing market will continue to be a magnet for capital and entrepreneurial energy that would be better deployed in more productive industries,” Carmichael wrote. “Thousands of entirely rational decisions could unwittingly erode Canada’s competitiveness.”
So what can governments do to break this collective fever? Non-resident speculation taxes like the one implemented in British Columbia may help at the margins, but they’re clearly not enough on their own. And while the Liberal government in Ottawa may introduce some pro-affordability measures in its forthcoming budget, it won’t want to risk upsetting homeowners in advance of a widely expected election. But if those Liberals win a majority of seats, as most of the recent polls predict, they should use their new mandate to do something bold: tax the massive capital gains accruing in many people’s homes.
As it stands, those gains are exempt from taxation, and that exemption can theoretically be claimed multiple times. But by establishing a lifetime ceiling on the capital gains exemption for principal residences — say, $250,000 — the federal government could throw a splash of much-needed cold water on an overheated housing market and capture some of the excess gains it has created.
It’s unlikely to have an immediate or appreciable effect on prices, since those are driven far more by supply (which is being constrained by the influence of NIMBYism on local planning decisions) and demand (which is being juiced by the ultra-low cost of money). But it would give the government a predictable new source of revenue, one that could be immediately put to more constructive and productive uses — say, by funding a reinvigorated national housing program that supports the construction of affordable units in our increasingly unaffordable urban markets.
Canadians would still have the equity in their homes from paying down their mortgages and would be able to pass that onto their children if they so choose. Home ownership would still be an effective and important way to build wealth, but it would no longer offer Canadians with a free call option on a speculative frenzy, and it wouldn’t exacerbate the existing challenges we already face with income inequality and intergenerational equity. And as silent partners in the latest surge in prices — federal support programs, after all, have almost certainly supported the demand for housing — the Canadian taxpayer should be entitled to a piece of the profits arising from them.
This would have the added benefit of effectively targeting the regions where housing prices have become most irrationally exuberant without punishing people living in locations where things have been more sedate. In Calgary and Edmonton, for example, house prices have barely crept back above their 2007 levels, so homeowners there would be mostly exempt from any new capital gains inclusion of principal residences.
It would also protect younger homebuyers, who have just gotten into the market in recent years (and missed out on most of the run-up in prices), and potentially open the door to more of them in the years to come.
Yes, conservative politicians and members of the real estate industrial complex would cry bloody murder about this idea. But with a four-year mandate and a clear need to address both the growing affordability problem in Canada’s biggest cities and a looming productivity issue in the economy as a whole, the Liberals should be willing to weather that storm. If they don’t, we’ll all end up paying the price down the road.
Comments
Interesting read, but, sadly wishful thinking. (One comment: I wish Max would shorten his sentences. I would make his writing more accessible to the average reader.)
It doesn't affect just resale, but decisions about what gets built and where. My childhood neighbourhood was transformed by DINCs into a mini-mansion day-time ghost town with nothing but cleaning ladies, lawn keepers, and dog walkers between breakfast and suppertime. The kids were so sparse the school board sent a fleet of taxis around to collect them, for a while. Until the schools themselves got knocked down. All because of people building the biggest, most expensive house they could afford in order to grab up the sure shot wind fall the primary residence bestows.
So yet another tax, this time on the one thing a person can own besides a TFSA that doesn't come with a tax... Are you insane? The Liberals are already unaccountable to the tax dollars they receive and spend. Between the Conservatives and the Liberals, they can't even get a new Frigate built, they can't figure out how to replace our air force jets, they haven't accounted for the mind-boggling $380 Billon they spent in detail, they don't even try to look they are planning for the future, and you want them to have more tax payer money, because it would be fairer to Tax Payerr?? On top of which they are discussing a basic living allowance equal to the $2400.00 in Covid month per month, which I don't mind saying needs to end because I can't hire entry level employee's because its easier for them to sit on their collective fundaments and take the government nickel. You just keep coming up with more inane articles each time you publish. I'll tell you right now, if the Liberals get a capital gains tax on principle property, we "the taxpayers" better get to write off finance interest charges on mortgages. The government already takes close to 45% of RRSP withdrawals, and they are set to increase the estate tax on inheritance, which is already rediculouosly high, in anticipation of the demise of Baby Boomers who sit on a colllective $6 Trillion in savings, and they are poised to eliminate the one-time capital gain exemption on business owners... What more do you want them to have? The shirts off our backs?
The shirt they'll let you keep. It's your roof they want.
Remember what happened to houses and farms in the Big Depression (1930's)? I heard a lot about it from parents and grandparents who lived through it.
You can't hire entry level employees right now because Covid. I can't operate my little home-based business at all, because I'm "locked in".
You might consider hiring poor seniors and givng them good personal protection. They've seen negative increases in purchasing power throughout Covid, they can't access the Covid monies, because they'll just be taxed back against their pension payments. Self-employment income was already taxed back 50-100%, depending on earnings.
One year, my marginal tax rate was 180%. It made it so I couldn't actually retire.
Who's discussing a permanent basic living allowance of $2400?
Maybe you could access it. You'd probably have to give back everything else you made, though.
Couldn't you draw the wage subsidy they offered?
It seems no business is too big or too profitable for that. Banks and telecom companies took it, and posted record profits.
The estate tax being talked about is on very large estates. It's probably part of why the very rich are anxious to "cash in" by taking their businesses public.
Blah blah. The overall tax amount going to governments at all levels as a percentage of GDP has fallen significantly over the years; all the anecdotal stuff in the world doesn't get us past that basic fact. All the squalling you see every time someone proposes a tax is a propaganda-determined reflex, not a reaction to reality.
And for property, there are two bottom lines:
1. The price of homes is no longer mainly determined by ordinary people buying homes, it is determined by speculators who have way too much government-provided cash from all the bailouts--the quantitative easing, the asset purchase programs and all those injections of central-bank-created cash and zero-interest debt. For them, property is just another stock market. If not stopped, they will keep on bidding up the prices into the stratosphere no matter what any real person can or can't afford.
2. To the extent that prices are determined by actual people living in homes and trying to buy them, they are going to be at the highest level that will allow an upper-middle-class couple to barely afford the mortgage. So for instance, the lower the typical mortgage interest rate, the higher the price will go. If government imposes some additional cost, prices will (if the speculators are reined in) necessarily go down until they reach the same total expense level. So the homes will cost the same, it's just banks will get a little less of it and government will get a little more.
There are ways of reducing what actual people actually spend on homes to a smaller percentage of their income. Rather than coming up with clever ideas about it based on our beliefs about how economics work (which are probably inaccurate, and more so if the person with the beliefs is an economist), we would be better off looking at examples of places where this has successfully been done, Germany for instance. They seem to mainly involve actual regulation rather than clever fiddles to try to get markets to do things right by themselves.
Yeah, that's it... Peg debt to relative GDP. No offense but that is the dumbest way to budget I've ever heard of. "Well, we have a $1.9 Trillion dollar economy so whats the big deal if we are at 50% of GDP in debt". That's what Trudeau's fathers economics were predicated on and it got us 22% mortgage rates, and slash and burn budgets pretty much the entire Chretien/Martin era to bring debt under control and inflation under control. When the s&^t hits the fan, interest rates creep up, inflation creeps up, and the government is coming back for more money from your wallet, remember you had no trouble with debt to GDP ratio budgeting.
Wow, that was knee-jerk. Try reading what I said. I said NOTHING about spending or debt, which is unsurprising because that would have been off topic, nobody was talking about (national) spending or debt.
I said the TAX RATE (overall) has gone down, as a percentage of GDP. Thus, there is room for tax increases and people complaining every time taxation is suggested are not thinking straight.
Admittedly, most (though not all) of the tax reduction has gone to the rich and corporations and I'd be quite happy if any increases hit them. But the tendency for people to act like scalded cats every time it's suggested that taxes could be used either to accomplish some goal or simply for revenue so we can achieve desired goals WITHOUT increasing debt, is largely prompted by corporate-backed think tanks.
I agree!
It's not intended to be accessible to the average reader. It's intended for readers of the Globe & Mail, to raise a warning to ppl who own real estate as an investment, and to buffer their short-term capital losses. Since the real estate market is regulated only by mortgage rates, it's wide open to investor profiteering.
Conservatives want a basic income, provided that it both be universal AND supplant all other income support programs, and not cost more than the current costs of income support programs. This necessarily means a lower payment than the poorest people now receive. Why? Because you have a fixed amount money, to be divided equally amongst more people. This has been the trend since the early 90s, at least. That was when I started to notice it. You notice they call it a "basic income" and not, say, a "guaranteed livable income." There's a reason for that. They're as different as day and night. One benefits the poorest, but not the richest. The other benefits the rich, the expense of the poor, while there's a huge disparity between those two groups of what is really being considered.
Similarly, the oil industry prefers a carbon tax paid by individual consumers, over any actual restrictions. If all carbon fuels are taxed, they're all affected. My old natural gas furnace fritzed a couple of years ago. It was 50 years old, and religiously maintained. And now, I'm paying as much for the carbon tax as I am for the price of the fuel itself. And with a furnace as efficient as it can be, I'm paying more for heating than ever. The profits are bigger, and the companies all along the road pass on *their* "environmental expenses" to the end consumer.
Similarly with electricity: over the course of the year, I pay as much as or more for the "customer charge" than for the cost of electricity itself. Most people think our electricity system is a public system: it is not. It is allowed to take profits (paid out to a handful of investors) on the order of 9%, which seems to me to be much higher than the average ROI these days. It hasn't changed for a long time, and was competitive when it was set in times of higher interest rates and higher returns. I.e., it's a gift we are forced by public regulators to make to private investors, paid for by end consumers.
Many, if not most of those end consumers whom pay their entire income to necessities: shelter, heat, water, garbage removal, food, clothing and necessary transportation. New clothing drops off the budget first, and the healthy food becomes discretionary. When the "free bad food system" (food banks) limits access (and every one I know of has limited access for 30 years now), there's not enough money for the shelter-related expenses, and the choice is eat or be homeless.
Think about it in the context of rent increases driven by real estate speculation, and a thriving investment rental business. It can continue only because enough people manage one way or another to pay exorbitant amounts, or because some geographical areas become unaffordable to the majority of the people who live there. I mean *really* unaffordable: none of that 30% of income to necessities BS. There always two sets of laws, two sets of rules, and two sets of *practice*: one that applies to the poorest people (who make up ever-increasing proportions of the populace), and one that applies to those who seemingly just can't bear to see them stay alive, the wealthiest and their lackeys/apologists, who ride their coattails or think they do.
The neoliberal law of rent is that privatisation increases the proportion passive income bears to total income. And that means employment income, and income support dollars, are less and less of the total, while more and more people have see reductions in the spending power provided by employment and, say pension incomes. It's far worse for ppl who for one reason or another are unable to work.
I'm now ... umm ... "quite old." Old enough to have experienced what the trident of neo-conservatism, globalisation, and neo-liberalism have meant to the vast majority of people. We've been hoodwinked into believing, through unrelenting long term media repetition of the mantra that capital, i.e., investor profits, makes us all better off, because they drive the "creation of he nation's wealth."
That fallacy brooks no alternatives, despite that Milton Friedman himself, eventually said of what he'd preached and taught and profited from for several decades, "I was wrong."
Then two things happened: the excellent Mr. Picketty produced his amazing two-part opus, on income and capital, and a couple of grad students located the *formatting* spread-sheet error, showing that the entire premise on which our global shift towards austerity was based on, basically, arithmetic errors, calculation errors of the sort that are fairly easily made (by novices) and can be spotted only by examining the formatting and operations applying to each and every cell. It's the kind of error that is hard to believe would be made by competent professionals. For anyone completely unfamiliar with spreadsheets, numbers formatted as text are not subject to arithmetical operations: they're skipped -- eliminated from the totals at the end of a row or column. A simple checksum process, like we learned to use in high school, doesn't catch it. Same applies to where in a row or column an operation starts and stops ... though it'd be harder to make that resistant to a checksum. And on the results of such an error rode all of the austerity measures of neo-conservatism, globalisation and neo-liberalism. Gobsmakked yet?
Now let's look at whatps happened to housing prices and rents through current Conservative and Liberal policy.
I don't know Mr. Fawcett, but have read a few of his opinions in support of an exacerbation of neo-liberalism, privatisation and conversion of everything to investments, all with Reverse-Robinhood outcomes.
What catches my eye immediately is his concern about this thing euphemistically named "The Economy," which has nothing at all to do with the economy (wellbeing) of most people. Only "investors": those with lots of disposable income. And the salaried and much bonussed executive class, who take some of their income as stock options, which aren't subject to taxation the way employment income is.
I fail to grasp why residential real estate, that is not purpose-built rental, should be subsidized by "taxpayers," owned by "investors" (aka "developers") ...
I fail to understand how it's a good thing for our collective well-being, for wealthy individuals to own several houses as investment rentals, (much less entire floors of apartment buildings ... or even entire buildings,) which they never intend to rent out: it's there just to park their "investment capital" and to reap the benefits of increasing property values. Not that the buildings necessarily get sold: instead, they get mortgaged, and the proceeds of the mortgage invested, freeing up the capital for another similar venture. That dog-in-a-manger style of investment screws costs for everyone, all over the world, in many sectors. Food, water, shelter, are all commodified, for the benefit of "investors," who ultimately take their dividends and capital gains from ppl who struggle to keep warm, dry and safe in winter, and to put decent, nutritious food in their fridges, and to pay for the energy systems to keep it cool or to cook it. Virtually all of those energy sytstems were made in the first place with public money (never subject to repayment), so that "investors" could profit (big) every step of the way. Same with communications systems.
"Regular" homes that are continuously occupied by owners or their immediate family should not be subject to capital gains, period. I'm not talking about monster houses, with a huge indoor pool in one wing. I'm talking about real homes, that real people buy to live in, not simply to rake in passive income to the detriment of the "real people."
This is a problem the world over. If you don't know what I'm talking about, there's an excellent TVO series called PUSH that deals with rent and property price increases, at:
https://www.tvo.org/video/documentaries/push-feature-version
It reduces supply, increases prices, increases rent (because investors are allowed to be landlords of homes that would otherwise be available for young people to purchse. And increased prices for existing stock means expectation of greater profits for developers who build new stock, and the beat goes on.
In the current state of affairs, there are only two things that can bring things into a reasonable balance: either corporations and their executives and owners stop being subsidized from the general purse and start to pay a fair share instead of taking, alongside incomes below median getting a huge boost. OR the real estate market be allowed to bottom out: which the banks and governments won't do, because of the massive amount of wealth being created that way for the 1%, or .1%, or .01%. Those percentages generally include members of government. They don't vote against their own personal financial interests. Unlike the swinoozled* believers in the hoax perpetrated on, basically, all of us.
*(swindled through bamboozlement)
An interesting read, followed by one particularly complex comment about capitalism.
But all this does not address the fact that some of us have a completely different attitude. Our house is a home, not a commodity. We invested a lot more than just money as we punched the renovation clock during evenings, weekends and vacations over 17 years of blood, sweat, tears and debt. We placed much greater value in reclaiming the architectural heritage that was stripped out during an unfortunate spate of "modernization" during the 70s Disco Decade, replaced with comically inappropriate design taste and Code violations. We also placed vastly more emphasis on investing in an attractive street lined with tiny lots in a walkable inner city neighbourhood with over 500 shops within a 15-minute commute by Reebok.
Tax or no tax, an exorbitant rise in value over 20+ years or not, we're not selling out unless presented with extraordinary, unanticipated circumstances. In all likelihood they'll be removing our well-aged bodies from the house in pine boxes after decades of enjoying a real home with infinitely more value than simple monetary wealth.
Would that our Canadian tendency toward inefficacious urbanism be broken soon. We need humane land planning to influence the economy through revised zoning bylaws that permit gentle, moderate infill density and the appearance of a plethora of small lots, lane houses, rowhouses and low -rise apartments (some subsidized) all offering more affordable homes for all incomes than presented by the discredited monoculture of sprawl. Sprawling detached single-family homes sitting on large lots are obsolete by the tenets of 21st Century planning and climate response. And there are many housing types and a diversity of prices not yet explored in a big way between the SF home and boxes in the sky.
There are things fundamentally wrong with the term “housing market”. Firstly, it is the land that people are paying astronomical prices for. An ordinary house where I live is likely to be assessed $1,000,000 for the land and $50,000 for the house.
What I really object to is that a place for people to live is treated like a commodity such as copper, gasoline or a mortgage. I bought my house as a place to live, not to make a profit. I would like to see any increase in land value become owned by the State; over many years most privately-owned land would thus become the property of the State and could be used in the best way for the people.
Another tax? After a lifetime of working, paying federal, provincial, municipal, sales tax, gst, carbon tax, scraping together enough for a down payment to qualify for a mortgage, then paying property tax, tax on insurance, tax on utilities, electric, heating tax, tax tax and more tax. I've been working and paying tax since I was 15 and I'm 61 now and retiring this year on a tiny pension due to health issues, and that will be taxed too. In all that time which I have worked I have had to live within my means, and our governments always seemed unable to, always looking to joe public to for another buck. Our elected and appointed public servants have little comprehension of what real working people endure and sacrifice to keep their heads above water. Like I said I'm about to retire with a barely livable pension, the disgraced Governor General wont have to face that reality, she will somehow be ok taking a generous pension and an expense account. Now Max wants to tax capital gains on my home should I sell it, after a lifetime of tax pain, Max is suggesting that in the end, a dry hump to homeowners will divert disaster in Canada's housing market. I think not.