How Can The Federal Election Shape The Housing Market?
“David: don’t make this blog political.”
That’s what I told myself each and every time I wrote parts of the blog in my head over the last seven days.
As I wrote on my blog last week, I was away in Prince Edward County, somewhere between Albury and Redernsville, and I didn’t have much of an outlet for my thoughts and opinions on all things real estate, politics, economics, and Toronto. Thankfully, my mother was on the trip, so we talked politics a lot over the course of the week, and I think that got most of it out of my system.
So can I actually write an entire blog about the upcoming election and how it might shape the future of housing in this country while holding back all the political commentary?
Unlikely. But I’ll try…
Alright, so we have a “snap” election that will take place a little more than thirty days from when it was called, which I suppose is better than the United States where they basically campaign from January 1st to November 20th. Then again, they hold elections every two years so aren’t they always campaigning?
In any event, there are going to be “hot-button” issues this fall, whether it’s the COVID-19 pandemic, the social/financial recovery from the pandemic, the economy, high inflation (unless you’re Trudeau and then monetary policy doesn’t matter…), education, healthcare, taxation, social justice, climate change, immigration, and of course, housing.
Now, I’m going to say this first and foremost, and I sincerely mean it: nothing is going to change.
There, I said it. And I’m just as sorry as I am not sorry, in that I feel awful for pointing it out, but it’s not my doing.
Not a whole lot has been done to address housing affordability since I’ve been in real estate.
There have been a lot of changes to the mortgage industry over the years, which comes from the government, via the CMHC and/or Bank of Canada. But how much has actually been done about housing? Next to nothing, in my opinion.
The true “issue” with housing affordability is that there are two sides to the coin. There’s the demand-side and the supply-side, and for years, all of the focus has been on the demand-side.
More than a decade ago, changes to the demand-side made sense and, looking back, were actually quite prudent.
The younger readers among you won’t remember the cause-and-effect of the 2008 financial crisis, although, you might have seen The Big Short so perhaps you’re aware. But I’m old enough to remember the mortgage industry before 2008 and I shudder to think about what our real estate market and the economy would be like in 2021 without the reactive changes that took place after watching the meltdown in the United States.
In 2007, I sold a house with 107% financing. My client, who ran a hedge fund and thought he knew everything, bought a house for $1,070,000, forked over a $50,000 deposit at the time of purchase, and then upon closing, the lender gave him a cheque for $124,900 which represented the 7% above his purchase price ($74,900) and the return of his $50,000 deposit.
In 2007, you could not only purchase a house without any money as a downpayment, but the lenders would actually give you up to 7% above the purchase price!
After watching the financial crisis play out in the United States, the federal government, led at the time by Stephen Harper as Prime Minister and Jim Flaherty as the Minister of Finance, sought to rein in lending practices in light of the madness that occurred down south.
The CMHC introduced a minimum 5% down payment on all properties. Think about that, for a moment. A minimum of 5%? Compare that to what we have today? It’s madness!
Over the next few years, we saw more and more changes to the mortgage industry.
A minimum 20% down payment on investment properties, vacation homes, or any second properties. Imagine how our market would look today if you could run around the city buying up investment condos with 5% down?
Gone was the 40-year amortization!
In 2007, a total of 37% of all new mortgages were for terms of longer than 25-years, as I wrote in my blog from July of 2008.
So just imagine in 2021, purchasing an investment property with $0 down, getting 7% back upon closing, and stretching your amortization to 40 years.
The changes made in 2008 and beyond were good. They weren’t implemented to address “housing affordability,” but rather to avoid the financial chaos that the United States experienced.
The changes made over the last few years were anything but good, however.
The changes to the demand-side of the market, over the last few years, were borne of a complete lack of understanding of how a market works, in my opinion. It’s also the “low-hanging-fruit” option for politicians who want to be seen as “doing something” in response to rising prices.
Making it more difficult for entry-level buyers in 2021, while leaving the door open for people with plane-fulls of cash to fly into Toronto and Vancouver and buy up real estate with Monopoly, er, Canadian Tire money makes little sense if you actually sit down and think about the problems in our market.
All the changes to the demand-side over the last five or six years have done nothing to help with true “housing affordability.”
So then, as the election approaches, do we believe that any of the candidates will do something to address the supply-side of the market?
The CBC put out a great summary of each party’s housing platform in this article last week:
“Main Federal Parties All Say They’ll Make Housing More Affordable”
Here are their bullet points:
The Liberals haven’t released their election platform yet, but we can glean some clues from the government’s 2021 budget, which doubles down on the government’s National Housing Strategy introduced in 2017.
The budget included a commitment of $2.5 billion to create 35,000 affordable housing units, $1.5 billion of which is dedicated to the government’s “rapid housing initiative,” which seeks to build new affordable housing units much faster than is typically possible.
The Liberals also proposed a new tax targeting “underused” housing.
The Conservatives’ election platform features a plan to build one million homes over three years, the conversion of at least 15 per cent of federal government property into housing and the creation of an Indigenous housing strategy.
A Conservative government would also bar foreign investors who are not living or moving to Canada from buying a home for at least the next two years.
The party also wants to encourage the offering of seven-to-10-year mortgages and to make tweaks to stress test and insurance requirements to help people qualify more easily for financing.
The NDP’s housing platform is centred on a proposal to build 500,000 affordable homes over the next 10 years.
The party is also proposing a 20 per cent foreign buyer’s tax on the sale of homes to individuals who are not Canadian citizens or permanent residents.
To help buyers get into the market, the party is also proposing the creation of 30-year mortgages insured by the Canada Mortgage and Housing Corporation.
The Green Party has not released its 2021 election platform yet, but the party has recently advocated for the federal government to redefine affordable housing using an updated formula.
The Greens have also proposed stronger regulation of foreign investments in real estate, and the creation of a federal “empty home tax” that would apply to foreign and corporate property owners who leave units vacant.
How can I follow this up without being cynical?
Alright, let me get this out of the way…
The Liberals haven’t put an actual platform yet, and probably won’t because Justin Trudeau’s best bet in this election is to avoid answering any questions whatsoever and simply continue to skate by on his smile and charm, which is how this university drop-out and former high school drama teacher was able to con his way into the most powerful position in the country in the first place.
I don’t think we’ll actually find out what the Liberals’ housing plan is.
The CBC is being kind to the Liberals by filling in the blanks with what was contained in the 2017 National Housing Strategy.
However, building 35,000 affordable housing units is barely what I would call “a start,” in a country of 38 Million people.
I will also add that we cannot tax our way out of this housing affordability problem, but I’ve beat that horse to death and beyond over the last few years. So the “tax on underused housing” won’t address the problem, unless every penny of that tax is used to build housing.
The NDP party, unlike the Liberals, have a platform.
Theirs isn’t as clean as the 160-page PDF that the Conservatives released, but they have a section called “Affordability” on their website and from there I can cut down on the fluff and give you their bullet points as follows:
Create at least 500,000 units of quality, affordable housing in the next ten years, with half of that done within five years. This will be achieved with the right mix of effective measures that work in partnership with provinces and municipalities, build capacity for social, community, and affordable housing providers, to provide rental support for co-ops, and meet environmental energy efficiency goals.
In order to kick-start the construction of co-ops, social and non-profit housing and break the logjam that has prevented these groups from accessing housing funding, we will set up dedicated fast-start funds to streamline the application process and help communities get the expertise and assistance they need to get projects off the ground now, not years from now. We’ll mobilize federal resources and lands for these projects, turning unused and under-used properties into vibrant new communities.
A New Democrat government will also spur the construction of affordable homes by waiving the federal portion of the GST/HST on the construction of new affordable rental units – a simple change that will help get new units built faster and keep them affordable for the long term.
We will re-introduce 30-year terms to CMHC insured mortgages on entry-level homes for first time home buyers. This will allow for smaller monthly payments, freeing up funds to help make ends meet for young families. We’ll also give people a hand with closing costs by doubling the Home Buyer’s Tax Credit to $1,500.
For Canadians who are open to innovative paths to home ownership, a New Democrat government will provide resources to facilitate co-housing, such as model co-ownership agreements and connections to local resources, and ease access to financing by offering CMHC-backed co-ownership mortgages.
To help put an end to speculation that’s fuelling high housing prices, we’ll put in place a 20% Foreign Buyer’s tax on the sale of homes to individuals who aren’t Canadian citizens or permanent residents
New Democrats will also fight money laundering, which fuels organized crime and drives up housing prices. We will work with the provinces to create a public beneficial ownership registry to increase transparency about who owns properties, and require reporting of suspicious transactions in order to help find and stop money laundering.
As for the Conservatives, you can download their girthy online PDF which is called “Canada’s Recovery Plan” and features Erin O’Toole in a black muscle-shirt that many people seem to think is photo-shopped. Of the 160 pages, it’s worth noting that eleven are of Mr. O’Toole and/or his family, and over thirty are stock images of people and places.
The section on housing can be found on pages 54 through 57.
Skipping through the political rhetoric and fluff, here’s their proposal in a nutshell:
Leverage federal infrastructure investments to increase housing supply by building public transit infrastructure that connects homes and jobs by bringing public transit to where people are buying homes; and requiring municipalities receiving federal funding for public transit to increase density near the funded transit.
Review the extensive real estate portfolio of the federal government – the largest property owner in the country with over 37,000 buildings – and release at least 15% for housing while improving the Federal Lands Initiative;
Incent developers to build the housing Canadians both want and need, by: encouraging Canadians to invest in rental housing by extending the ability to defer capital
gains tax when selling a rental property and reinvesting in rental housing, something that is currently excluded; and exploring converting unneeded office space to housing
Ban foreign investors not living in or moving to Canada from buying homes here for a two year period after which it will be reviewed. Instead, encourage foreign investment in purpose-built rental housing that is affordable to Canadians.
Encourage a new market in seven- to ten-year mortgages to provide stability both for first-time home buyers and lenders, opening another secure path to homeownership for Canadians, and reducing the need for mortgage stress tests.
Remove the requirement to conduct a stress test when a homeowner renews a mortgage with another lender instead of only when staying with their current lender, as is the case today. This will increase competition and help homeowners access more affordable options.
Increase the limit on eligibility for mortgage insurance and index it to home price inflation, allowing those in high-priced real estate markets with less than a 20% down-payment an opportunity at home-ownership.
Fix the mortgage stress test to stop discriminating against small business owners, contractors and other non-permanent employees including casual workers.
Last, but not least, this little ditty:
Canada’s Conservatives will never tax Canadians’ capital gains on the sale of their principal residence, something many within the Liberal party are threatening to do.
Alright, that last part had nothing to do with building 1,000,000 homes in the next three years, or their “detailed plan to tackle home prices,” but it’s worth noting because I remain 100% convinced that exemption on capital gains tax on a primary residence is coming to an end.
So how did I do?
I mean, about not making this political? 🙂
Okay, I’ll make you a deal: if the Liberals actually put out a platform in the form of a PDF or even a crayon drawing by Justin, then I’ll buy Tim Horton’s coffee for anybody who calls me out on it.
In the meantime, what measures do you think are necessary for the next government to undertake to actually enact meaningful change in the housing market?
For those who are low on initiative today, how about multiple choice? The topics to address:
a) Building affordable housing
b) Addressing foreign ownership
c) Building/investing in infrastructure to help urban sprawl
d) Tackling money laundering and chasing taxes owed by non-residents
e) Changes to CMHC policies regarding amortization, mortgage term, stress tests/qualification, etc
f) Incentivizing and/or partnering with developers to boost housing supply
g) Something novel that I haven’t included!