Budget 2024: Betting the farm on housing

Clearly, it’s go big or go home on housing this year. This part of the budget was pre-announced last week to ensure it wasn’t lost in today’s budget coverage. And it’s worth digging into this major push. The housing measures aren’t the biggest spend in the budget, but that’s largely due to much of the housing support coming in the form of lower-interest loans to buy and build rental housing. That type of support doesn’t show up at its full value in a budget.

So let’s look in more detail at the changes in the budget to see what impact they might have — and when.

There have been big top-ups to the major loan programs, first on the apartment construction side, up $15 billion, and second, on the Affordable Housing Fund, up $1 billion. The construction fund is for for-profit developers to build some affordable units, and the Affordable Housing Fund is for non-profits to build and renovate buildings.

What’s interesting about these top-ups to these two large programs is that they’ll have no immediate impact. The programs are nowhere near fully subscribed anyway. Take the Apartment Construction Loan Program. Prior to today’s budget, it had $40 billion in loans to give away, but only $18 billion was spoken for, leaving $22.5 billion available. Budget 2024 added another $15 billion to that total, but as it was nowhere near fully subscribed, it doesn’t matter. Now, a higher ceiling may matter in the future, but it doesn’t change the picture today.

Compare that to the Rapid Housing Initiative (RHI), which allows non-profits to buy and rapidly renovate existing buildings so they can provide supportive housing. The RHI is heavily overscribed; it has gone through three rounds and each round, it receives more applications than it can fund. It only received a $24-million top-up in this budget.

This budget introduced another important program that is almost certainly underfunded, the Canada Rental Protection Fund, which will provide $1.5 billion in loans and grants so non-profit housing providers can outbid private investors for existing apartment buildings that are up for sale. I suspect, just like the RHI, this will get far more applications than can be funded. It is a good way to keep rents from going through the roof, but likely won’t be funded nearly enough.

Regulatory changes can also play a role in housing, and the federal government has been quite creative on this front. First with the Housing Accelerator Fund and now in this budget with the $5 billion for the provincial portion of the Canada Housing Infrastructure Fund. Each is trading money for changes in housing rules where the federal government has no jurisdiction to force the issue. The municipal version paid cities to change various zoning restrictions and the provincial version will pay the provinces to allow fourplexes everywhere as well as instituting renters’ and homebuyers’ bills of rights.

Is this budget inflationary?

In broad strokes, this budget has almost the same deficits as the fall fiscal update at just below $40 billion a year. The deficit is the interaction of the federal budget and the economy. The same deficit means the same impact on economic growth … and likely inflation.

What is useful to understand is what’s driving inflation now and the answer is clearly housing costs. This is either from mortgage interest costs or from rent increases. Both are directly tied to high interest rates. Bring rates down, you bring these parts of inflation down.

In fact, if you remove just those two costs from the Consumer Price Index, it sits at or below the two per cent target, and it’s actually been there since October 2023. Housing affordability is the issue, and solving it also solves inflation.

This budget will definitely be a shot in the arm for apartment construction and affordable units. The trouble is that rewards will be reaped by the next federal government, whoever that might be. The lead time on the impact of this budget on housing is at least two years, and probably more.

The two measures that would have the biggest impact on housing affordability in the short term would be decreases in mortgage interest and rent controls. The interest rate is the domain of the Bank of Canada and rent controls could have been included in the renters’ bill of rights, but now seem to be off the table.

New housing investment plummeting

One of the missing pieces of the housing debate is how much new construction is actually falling, not rising. There is a crisis of affordability, to be sure, but high interest rates crush new home construction as builders now pay much higher carrying costs before they sell, and they aren’t sure consumers can afford higher prices.

Now, this impact has largely been on the single-family homes front, something Canada has plenty of already, but the aggregate fall in new housing construction is running at $8.7 billion a year compared to pre-interest rate rises in February 2022. Federal supports from this budget are nowhere near that high. If anything, the federal housing program will slow the fall in new residential construction and shift it to rental.

On the housing front, federal ambition is approaching the scale of the housing affordability crisis. There’s plenty more to do and the focus is squarely on supply with fewer short-term measures like rent controls. The build approach takes time, though, and Canadians likely won’t see the benefits of these measures for several years. So we’ve got an ambitious plan whose benefits will accrue to the next federal government, whoever that might be.

David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives.