Bubbles, Programs and Policies

Today, the Globe and Mail’s Report on Business (ROB), to their credit, has a major spread on the Ontario Government’s effort to cool the housing bubble in the Toronto region. (Globe and Mail, ROB, April 22, 2017) Their conclusion is that this is a political fix that will do very little to reduce the price of housing.

It is Barrie McKenna, the ROB feature writer, who says that the government’s response was political, but that is not the point. The rising prices of homes are making it virtually impossible for new buyers to purchase housing, and that is a serious political issue. Governments should respond to this crisis. The real question is, will the new government policy work?

A new building within Regent Park, an old public housing project.

For that we have to turn to another ROB reporter, Janet McFarland, who spent her time over the last couple of days talking to realtors who have first hand knowledge about buyers and sellers. Their opinions are consistent. The policy will have a marginal impact at best and maybe no impact at all.

The 15% foreign buyer’s tax is the major policy change designed to take some of the air out of the housing bubble. Realtors selling to foreign buyers told McFarland that the new tax will make very little difference. These buyers are wealthy people trying to get their money into a safe haven such as Canada. The Canadian dollar is low, this country is stable politically, and is seen as an ideal place for a secure investment. One real estate agent told her that the exemptions to the tax will mean that only about 20% of foreign buyers will have to pay the tax and it will not be a disincentive at all for them.

The conclusion of those with first hand knowledge of the industry is that it will not work. There may be some psychological benefit, but that will be marginal and short term. The only thing that might work is some form of tax on speculators who buy property and flip it for a profit. A tax like that would apply to everyone and would be very hard to administer. Governments are reluctant to use such a blunt instrument to deal with such a complicated problem.

We are left, then, with what economists call “market forces” to dampen the housing bubble. McFarland quotes agents who say the high prices are attracting more listings. That increase of supply could help to dampen prices, but as long as demand remains high the tendency will be for house prices to drift upwards.

I am not surprised by any of this. To put the crisis baldly, middle and low income families and individuals have been priced out of the market, and there is very little the government can do about it. I am coming to the conclusion that this is not a housing bubble; the market has established a new price plateau, and it is likely that prices will continue to rise.

If the Ontario Government policy is not going to work, then what should we do? I believe we need a new government led program that will provide decent housing for middle and low income families because they are the ones suffering from the high cost of housing.

This does not mean that the government should build public housing, and create ghettos for the poor, like they did in the past. There is another model of co-op and non-profit housing. In this program, government provides start-up funding to agencies like the Co-operative Housing Federation of Toronto, churches, unions, community associations, ethnic groups and so on. They then raise a mortgage using a government guarantee, build the housing and manage it over the life of the building.

These types of projects are low risk for the government. It is a form of investment where the pubic recoups its money as the mortgage is paid off. These projects provide good housing and strong communities for hundreds of thousands of people. At the same time a comprehensive housing program such as this will tend to dampen the housing market and stabilize prices. That will benefit first time buyers who want to own their own house or condo.

If we don’t provide a comprehensive housing program that helps middle and low income people get decent housing that meets their needs, we will pay a terrible price. Living standards will deteriorate for a large number of people in our cities and that will bring any number of serious social problems and costs.

Providing good affordable housing is political. It is a legitimate role for government to provide good housing because it is an essential for a decent life. Let’s stop band-aids and get on with a program that will benefit all Canadians.

Federal parties on affordable housing

The federal election is now in high gear, and it is fair to ask, what are the political parties promising to do to solve the problems of cities? This posting is the first in a series looking at the promises of the federal parties. We begin with perhaps the most urgent urban problem of all: the crisis of affordable housing.

It is important to recognize that affordable housing is not a municipal issue. Municipalities do not have the tax base to provide a program like this. Only the federal and provincial governments, with their access to income, corporate, and value added taxes and value added taxes have the financial ability to implement an affordable housing program.

That is why we should target the federal parties during this election and demand they tell us what they intend to do to meet the affordable housing crisis.

Policies benefit homeowners, not those in need:

After the Second World War the Canadian federal government established housing policies, but virtually all of those policies benefited home owners, not renters. These programs are why urban sprawl has become such a serious problem in our cities.

Urban sprawl in the GTA. Government housing programs encouraged sprawl

Urban sprawl in the GTA. Government housing programs encouraged sprawl

CMHC was established in 1946 to provide low interest rates to developers and guarantee mortgages. Financial regulations were changed to permit the entire value of the house to be used as equity when calculating mortgages. This stimulated housing construction and suburban growth. Soon Canada had among the highest home ownership rates in the world.

Municipal governments zoned and serviced land that permitted suburbs and cheap housing. Since the 1970s a steady stream of home purchase assistance programs were created to encourage ownership.

The most generous benefit provided to homeowners is in taxes. Rental properties pay property taxes at about twice the rate of homeowners in Ontario. Perhaps the biggest benefit is that homeowners pay no capital gains when they sell their principal residence. This benefit amounts to about $6 billion a year.

Government policy for renters

While there is government support for homeowners, there has been only modest support for those who rent housing, and renters, on average, have lower incomes and a much lower level of assets than owners.

Regent Park in Toronto, the first of the major Canadian public housing projects, was approved in 1947 and built largely with municipal money. Other municipal and provincial projects followed. In 1963 the federal government provided subsidies for low-income households and since then some 200,000 public housing homes were built.

By the 1970s there was major criticism of public housing because the concentrations of poor people were causing social problems. In 1973 the federal government created legislation and financial support for housing co-ops and non-profit profit housing sponsored by groups like churches. This program was cut by the Mulroney Conservative government in the 1980s and finally the federal Liberals cancelled the program in 1993.

Woodsworth Co-op in St. Lawrence Neighbourhood, Toronto

Woodsworth Co-op in St. Lawrence Neighbourhood, Toronto

Today about 2,000 housing co-ops continue to exist, providing housing for about 250,000 Canadians. Between 25% and 30% of the people living in those buildings receive rent-geared-to-income (RGI) subsidies. Others pay market rent. This created mixed income housing that is much praised by planners and those concerned with social policy.

Since 1993 the federal government has not had an affordable housing program. Money for new co-ops and non-profits is not available. Canada now is the only developed country without an affordable housing strategy.

Some federal money is spent on aboriginal housing and the homeless. The government also fulfills some housing commitments made by previous governments but that is all. The policy of the present federal government is to stop all federal affordable housing grants and support after present commitments terminate.

Affordable housing is an urban issue

Almost 70% of the people in Canada own their own homes, but the proportion of home ownership in cities is much lower, and it is lower in large cities than in smaller cities.

In Toronto 51% of households are owners, in Vancouver 51.5%, and in Montreal only 38% own their own home. Smaller cities have a higher percentage of ownership but still not as high as the Canadian average. Hamilton, for example, has 65.2% owners. However, in the GTA outside the City of Toronto almost 80% of residents are owners.

People living in rental accommodation in larger cities, particularly Toronto and Vancouver, suffer from very high rents, and these rents are escalating faster than the cost of living. Many spend in excess of 50% of their income on rent. Incomes have stagnated while the cost of living, particularly rents, are rising. This is causing real hardships for hundreds of thousands of people.

Added to this, a large number of the older rental apartment buildings have deteriorated. Elevators break down. Windows and doors are inefficient raising energy costs; transit service to apartment buildings in the suburbs is inadequate.

Clearly the lack of affordable housing in cities is a serious urban crisis, and it is getting worse. Governments, particularly the federal government, have the financial ability to create innovative affordable housing solutions, but since 1995 Canada has had no national affordable housing program.

A key question in this election then is, what are the political parties promising to do to meet the affordable housing crisis?

Political commitments on affordable housing

The Conservatives say that they will continue with their existing programs, and that means no affordable housing program at all.

On August 15, 2015 the “Conservative Plan for Affordable Home Ownership” was released, but like the policies of the past, it is a program to help homeowners, not the over 30 percent of Canadians who are renters. In the Conservative plan they say they “believe in helping Canadian families purchase their first home,” and promise a tax credit of $5,000 for first time home buyers.

The Conservative policy is to help those who can afford to buy a home and in large cities homeowners are more affluent than the average. It has nothing for renters. Help the affluent, ignore those in need, is the Conservative promise.

The NDP calls for “a National Housing Strategy and long term government investments in social and affordable housing in Canada.” (NDP news release 22 November 2013) The party introduced a bill in the House in 2012 condemning the Conservatives for the lack of action on affordable housing, saying that if elected they would consult widely on housing and meet the needs of aboriginals and the homeless.

Tom Mulcair, the New Democratic leader, has gone out of his way to support housing co-operatives. On June 26, 2015 he promised to renew operating agreements to maintain the current funding for housing co-ops and social housing.

What the NDP has not done is state clearly what type of affordable housing program they will introduce if elected. Will the party favour co-ops and non-profits? Do they advocate mixed income housing? Will there be a program to renovate deteriorating privately owned rental buildings? We just do not know.

The Liberals are in favour of an affordable housing program and call for a National Housing Commission on housing. Much of the Liberal effort is used to attack the Conservatives for their lack of an affordable housing program, but they have put little effort into outlining what type of program they would legislate.

In the election Justin Trudeau, the Liberal Leader, has said that they will provide $550 million over two years for affordable housing and a tax credit worth $400 million for green renovations. The Liberals also add that they will pay 50% of the cost of energy audits.

So that’s it

The lack of affordable housing is most serious problem facing low income renters in the big cities, and all we get from the political parties vying for our vote is vague promises. It is up to those of us concerned about affordable housing to demand answers and details.