(March 16, 2017) Eliminate discrimination against tenants and the housing bubble would quickly disappear.
The Greater Toronto Area is heading into a catastrophic housing bubble, some experts warn, pointing to a raft of scary statistics, such as the sale of detached homes averaging $1.2 million in February, a 32.5-per-cent increase over a year earlier. In a panicked response to this possible crisis — the 2007 U.S. housing bubble is still fresh in people’s minds and some still shudder over Toronto’s 1989 housing bubble — politicians, planners and pundits are recommending everything from tighter lending rules, to a tax on purchases by foreigners, to subsidies for more affordable housing. With the federal and provincial governments running worrying deficits, fears abound that a housing shock could send Canada into recession.
Rather than trying ad hoc reforms designed to tamp down housing fever without harming economic growth, the politicians and planners should let the free market normalize the housing market by eliminating discrimination against tenants. The bubble would quickly disappear, ending its risk to the greater economy as well as ending a major injustice to those who are less well off.
For most homebuyers in the Toronto region, the choice is between renting and buying — 53 per cent of GTA homebuyers are first-time homebuyers, according to an Ipsos survey conducted for the Toronto Real Estate Board. Many tenants look at the rent they’re paying, compare it to the cost of carrying a starter home, and decide that, on balance, they’d be better off jumping into the housing market. What they don’t realize is that they’ve been pushed into making the jump because the scales have been tipped against tenants and for owners by governments at all levels.
Toronto’s municipal government is especially good at gouging tenants. Unbeknownst to most tenants, their property-tax rate is three times that of homeowners since apartments are taxed at triple the rate of private homes. City councillors have good reason to turn the screws on tenants. For one thing, tenants don’t pay property taxes directly — these are buried in their rent, leading tenants to blame their landlords, rather than their councillors, for high rents. For another, homeowners are likelier to vote than tenants, largely because many tenants are immigrants who lack citizenship.
If the city taxed homeowners and tenants equally — or even better, if the city moderated the property tax through user fees that had homeowners and tenants paying a fairer share of the costs they impose on the city — home ownership would look much less the bargain to the tenant feeling pressure to buy a home. If city property taxes on businesses also reflected actual costs — rather than being raised to confiscatory levels to cross-subsidize the homeowner — home ownership would look like no bargain at all.
Federal and provincial governments also pull tentative tenants into home ownership. No money for a traditional down payment? The Canada Mortgage and Housing Corp. promotes down payments of as little as five per cent, encouraging tenants to get in over their heads by making a premature house purchase. Privatizing CMHC, a Crown corporation created decades ago for the very purpose of encouraging home ownership over rentals, would instantly deflate the real estate bubble by removing the single-biggest reason the home mortgage market is over-leveraged — CMHC guarantees about half of new residential mortgages.
To these major enticements into the home market are myriad others, all in aid of heating up the real estate market, among them the First-Time Home Buyer’s Tax Credit, the Home Buyers’ Plan provision for RRSPs, the GST New Housing Rebate, Ontario’s land-transfer tax exemption for first-time buyers and the absence of capital gains tax on primary residences. These all speak to a governmental industrial policy aimed at encouraging home ownership that dates back to the 1930s, when the federal government passed the Dominion Housing Act to subsidize housing, kick-start the economy and, especially, improve Canada’s social values.
Programs to promote home ownership are now destabilizing the Toronto market
Then as now, governments saw home ownership as a promoter of social stability. This bias is even stronger in the U.S., where mortgage interest can be deducted against income, and where in recent decades the federal government’s reckless determination to subsidize housing culminated in the Great Recession of 2007.
This, then, is the ultimate irony. Rather than promoting economic and social stability, the untoward promotion of home ownership perversely becomes the destabilizer.
A housing bubble may or may not exist in the sense that a collapse of house prices — and maybe the greater economy — is imminent. A housing bubble certainly exists in the sense that people own rather than rent their homes through governmental social engineering. Prick the programs that created that bubble and watch as the air is slowly and safely released.
Lawrence Solomon is executive director of Urban Renaissance Institute. Email: LawrenceSolomon@nextcity.com.