The Changing Face of Housing
Canadians often talk about the accelerating pace of change in today’s world and speculate about where it’s all going to end. The integration of mobile phone technology and computers is probably the best example to date and the next big
one could well be driverless cars. Although these advances bring greater convenience and efficiency they also confirm the ‘law of unintended consequences’ by generating social change with the long term impact not always readily apparent. We can easily see the immediate benefits of a technical advance in speed or power but the social impacts may not become apparent for years or even decades.
There have been some dramatic changes in Ontario’s housing system over the past few decades and the implications on our society are only now being recognized as profound and quite disturbing. Most major news services include at least one article a day on the ‘affordability’ crisis facing Canadians as if this was a new phenomenon. The Federal and Provincial levels of government are finally talking about the problem but it has now become so complex there are no easy answers. Housing is such an integral part of the Canadian fabric that changing any single factor can send financial ripples from coast to coast.
Over the past ten years, the national, provincial and local Home Building Associations across Canada have dedicated a vast amount of their time and resources to try and draw the attention of elected officials’ at all three levels of government to the rapidly accelerating affordability crisis, with limited success. Not only have some governments such as that in Ontario been unable to grasp the problem but they have worsened it by constantly adding new, inappropriate and expensive requirements.
So what have industry experts been telling elected officials for over ten years? There are many factors that affect affordability, some more so than others, but we can say with certainty that anything which restricts supply in the face of continuing demand will result in price increases. Restrictions in supply can be the result of geography and / or government policy. Vancouver and Toronto are the two most obvious examples of this.
Vancouver is confined by the Pacific Ocean on the west and south, and the mountains on the east, so its ability to grow efficiently is severely restricted. In addition, the demand for housing at almost any price being driven by Chinese investors has created a serious housing shortage resulting in significant price increases – 30% in 2015 alone. In Toronto the housing shortage has been driven by environmental policy at any cost. By implementing a greenbelt and continuing to expand it, government policy has restricted the supply of land. This has limited the supply of all low rise housing types and resulted in dramatic ongoing price increases for this housing form. Residents must increasingly opt to buy housing types such as small high rise condos because that is all they can afford.
Similar phenomenon have occurred in other jurisdictions such as Ottawa where a greenbelt has existed since the mid 1950’s resulting in artificially high housing prices relative to demand and this was exacerbated in 2003 when the City adopted a policy of intensification. This immediately restricted the supply of land and has since increased suburban land prices by 300%.
At the same time as government policy has been restricting housing supply, it has also implemented dramatic tax increases. Since the late 1980’s government tax on a new home has increased from about 3% to 25%. All three levels of government have participated in this tax increase. At the federal level it was the introduction of the GST. At the provincial level it was introduction of the PST and Land Transfer Tax. At the municipal level it was the introduction of Development Charge taxation. DCs were designed to shift 90% of the cost of new infrastructure away from property tax payers at large and focus it solely on new home buyers. In Ottawa, the average price of a new starter single family home is about $450,000 of which $110,000 is tax in one form or another.
The problem that federal and provincial governments now have, is that most of this tax revenue is being spent on important social programs such as health and education. It is therefore highly unlikely that they would willingly reduce taxes on new housing because in order to do so they would have to decrease social spending or increase deficit spending. Municipal governments face a similar dilemma, if they were to reduce development charge taxation they would have to either reduce infrastructure spending or revert to the original system of charging all property tax owners a little bit more and risk their ire come the next election.
What all of this means for the millennial generation is that home ownership levels in Canada have likely peaked and will now trend downward as demand for rental housing increases. Historically low interest rates have masked the affordability crisis for years but even those are no longer sufficient to maintain the illusion. As we move forward, increasing numbers of millennials will become long term or lifelong renters because salaries have not kept pace with new home price growth. Increasing numbers of millennials will retire without the benefit of having built equity in a home and will have to rely increasingly on government support as they age.
There is a certain irony in the Ontario government’s recent push to have the Trudeau government expand CPP on the grounds that it would strengthen Canadian’s future retirement prospects while at the same time taxing them in much greater amounts through new home purchases.