David Jones is a policy analyst and economist. He is studying public policy at the Munk School of Global Affairs & Public Policy, University of Toronto.
Why is Canada’s housing crisis so hard to fix?
Like many public policy issues it is, of course, a complex problem. Government housing funding cuts in the 1990s and construction capacity constraints have limited supply growth. Population expansion and the expectation that prices will continue to rise have buoyed demand. Price growth has been fuelled further by a decade of low interest rates (prior to 2022) and relaxed speculation rules.
Despite the complexity, the dynamics of democracy itself have a lot to answer for. Real solutions are unpopular, and Band-Aid fixes – which ultimately exacerbate the problem – are far more appealing to the electorate.
Let’s start by looking at what isn’t working. Namely, the raft of financial demand-side measures employed by governments to support homebuyers who are priced out of a market.
Take the first home savings account, for example. Launched in April, 2023, the FHSA permits up to $40,000 in tax-free savings for future first-time homebuyers in Canada. This might sound appealing, even intuitive, as targeted support measures aim to reduce housing inequalities.
But as more people participate in the housing market, there are more potential buyers for the same homes, which pushes up prices further and worsens the affordability crisis.
While such demand-boosting policies ultimately backfire, demand-suppressing options are even more obviously detrimental. For example, raising interest rates help to moderate (or even reduce) house prices. But rising mortgage costs then make home ownership even less affordable. This pushes more people to the rental sector, which fuels demand and inflames the vicious price spiral for rental properties.
Rather than manipulating housing demand, the sustainable long-term solution is to increase the supply of affordable housing. Canada’s policy makers know this well and have made commitments to address it, including through the successful Rapid Housing Initiative and the coming $4-billion Housing Accelerator Fund.
The latter offers financial incentives for local governments to increase housing supply at a rapid pace, with bonus incentives for growth in affordable housing. Higher supply will reduce scarcity and offer a route to price moderation.
But new housing construction takes time to ramp up, so prices will remain lofty for years to come. Why has it taken the current crisis for Canada to get so serious around housing supply?
As we step back to consider both the inflationary demand-side policies and lagging supply-side initiatives, the emerging golden thread is the dynamics of democracy.
Financial measures to support homebuyers offer short-term promise and a politically positive message. The government plays good cop by offering subsidies and tax credits, while free markets and developers take the blame for rising prices. Politicians can feel some relief at current falling prices without worrying too much about losing electoral support, as the bad cop role is reserved for the Bank of Canada and its interest rate hikes – a political benefit of the central bank’s independence.
Similar issues become apparent on the supply side. Home ownership rates and voter turnout rates both increase with age (albeit declining slightly for retirees), so there are some political incentives to moderating supply growth and allowing house prices to remain strong. At a local level, NIMBYism has resulted in municipalities being reluctant to update zoning rules or increase density, thus again constraining supply expansion.
So what is the solution?
First, robust policy analysis is required to elucidate the indirect adverse market implications of well-intended demand-side financial support. Governments are right to address inequities in housing ownership across generations, but should pursue initiatives that do not further inflate house prices.
Second, young generations need to raise their voices and use their vote. The growing sense that home ownership is becoming unobtainable fuels apathy and acceptance. Higher voting turnout and greater representation on housing would force governments to go further and faster on boosting supply.
Finally, democracy itself may yet offer the solution. Provincial governments – in Ontario and British Columbia for example – have legislated to override certain local planning and approval rules in support of increasing supply, despite risking disapproval from existing homeowners.
Provincial and local governments need bravery – alongside sensitivity to environmental and community issues of course – to deliver the housing supply that Canada needs.
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