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.

One thought on “Bubbles, Programs and Policies

  1. Thank you, Bill, for this thoughtful, cogent , and perceptive piece about an urgent problem that will affect generations to come.

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