How to solve Canada’s housing crisis in one fell swoop

How to solve Canada’s housing crisis in one fell swoop

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Get government out of the business of regulating and encouraging housing. Nothing does more to hinder those who could get the job done

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Prime Minister Justin Trudeau has made increasing housing a top priority by committing to “the most comprehensive and ambitious housing plan ever seen in Canada.” Unfortunately, he is also committed to muddled policies that kneecap his housing goals.

Trudeau’s decision to increase the capital gains inclusion rate for individuals from 50 per cent to 67 per cent on gains above $250,000, and for businesses on all gains, demonstrates his failure to understand the complexity of markets.

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The large real estate developments Trudeau needs to increase the housing stock largely depend on residential property developers’ ability to assemble land on major thoroughfares. Because the mom-and-pop shops that would ordinarily sell their land to assemblers will now face a higher capital-gains tax hit, they will become reluctant to sell unless compensated by higher prices, making many developments financially unviable.

Moreover, the new housing that does get built will be costlier than otherwise, putting it further out of reach for an increasing number of home-seekers.

The capital gains hike will deter investment across the board. In housing it will act as an all-purpose house-construction killer. Fearing high taxes upon an eventual sale, shopkeepers will less often convert the attic above their store into a rental unit; homeowners will think twice about adding a granny flat. With less incentive to sell, many who had considered disposing of underused second homes will keep them off the market.

Trudeau has even been chipping away at Canadians’ one great incentive for home ownership — the capital gains tax exemption for primary residences. Entrepreneurs short on funds but handy with a hammer have long enhanced the housing stock by buying dilapidated houses as primary residences, upgrading or subdividing them to make them marketable for their neighbourhoods, then re-selling them and repeating the process in new homes.

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These sweat-equity builders, now deemed “house-flippers” by CRA, are treated worse than other businesses: They are denied not only the capital gains exemption if their upgrade proves profitable but also the ability to claim deductions in real estate downturns that see their homes sold at a loss.

Trudeau has also targeted would-be homeowners who planned to finance their home purchase by renting out rooms via Airbnb. Under his Fall Economic Statement, homeowners could be denied all tax deductions associated with their short-term rentals, making them unviable for homeowners, along with any dream of affording a home.

Other federal attacks on home ownership target foreigners who would improve our housing stock through the Prohibition on the Purchase of Residential Property by Non-Canadians Act. The Underused Housing Tax subjects foreigners who want to provide a home in Canada for friends or family to a one per cent tax on its market value – meaning a million-dollar house faces an added annual tax burden of $10,000.

To counter all the brakes he has applied to the housing market, Trudeau has tried lead-footing the accelerator, such as with his 2017 $82-billion National Housing Policy, designed to better house millions of Canadians. Yet since then housing costs have soared and more affordable housing units have disappeared than have been built.

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The government’s response? A blizzard of new spending in its 2024 budget to be piled onto the past spending that proved so counterproductive: $6 billion for a Canada Housing Infrastructure Fund, $15 billion to top-up an existing Apartment Construction Loan Program, $50 million for a new Homebuilding Technology and Innovation Fund, $50 million to modernize and expedite home building through the regional development agencies, $500 million to support rental housing, etc.

The public’s response? Ninety per cent are unmoved; only 10 per cent believe the government’s new housing budget “will help alleviate the crisis,” according to a Renters.ca poll of the 2024 budget. That same poll found that 92 per cent of renters have difficulty finding housing they can afford.

The harder Trudeau tries to boost housing, the worse the results. If he truly wants to boost it, he should stop trying. Nothing hinders those who would provide housing to those who need it more than government does.

A real-life experiment in what happens when government does get out of the way has played out in Argentina, where a radical libertarian, Javier Milei, recently came to power. A month after he repealed a law that employed rent controls to prevent “rent gouging” in Buenos Aires, the supply of available apartments doubled and rents dropped 20 per cent. Landlords and tenants now freely negotiate rents on terms and in currencies of their choice, without benefit of government guardianship, and both thrive.

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By slashing government spending and deregulating the economy, Milei also dramatically lowered interest rates, creating a boon for homeowners. “Argentines flock to banks as Milei awakens mortgage market,” the Buenos Aires Times reported last month. Argentina’s banks are now processing tens of thousands of loans to potential homeowners who believe Milei’s deregulation will keep interest rates down and home-owning affordable.

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Argentina solved its housing crisis when it realized it had too little housing because it had too much government. Canada can solve its housing crisis through the same realization.

Financial Post

Lawrence Solomon (LawrenceSolomon@nextcity.com) is a founding columnist of FP Comment.

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