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To Fix Housing For Good, We Must Stop Treating It Like A Piggy Bank

Philippe Fournier proposes a collection of reforms designed to realign the economic incentives of the housing market so that productive housing improvement would become more profitable than passive, inefficient ownership

Something is rotten in the state of Canada’s housing market. The second-largest country by landmass on earth has somehow produced the world’s second-most overheated property market. Home prices nationwide have spectacularly outpaced incomes for years, in defiance of market fundamentals. The signs of this crisis are visible in daily life without even glancing at the data. Hard-working families who save diligently for years sit dumbfounded while realtors explain that yet another six-figure over-asking offer outbid them on a promising home. Young couples delay or forgo forming families in a desperate attempt to catch up to the market. Fake handwritten notes promising no-strings-attached cash offers overflow mailboxes. Perhaps the most emblematic picture of the rot is in Vancouver, our most expensive city, where homeless encampments line East Hastings Street mere steps away from the ghostly luxury condos downtown.

Castles in the sky

The political implications are toxic. Frustrated young home-seekers—especially those without access to the bank of mom and dad—begin seeing their propertied elders as class antagonists, while priced-out locals resent propertied outsiders. Faith in public institutions erodes if people regard them as unfair gatekeeping tools, impeding social mobility. People are less willing to make trade-offs for other urgent priorities, like climate change, when their standard of living becomes precarious. And a widening pool of people at the very bottom is angered by leaders promising inclusion while they consistently feel excluded from basic dignity, let alone economic spoils.

Also significant are the costs to the broader economy. Canadians are taking on more mortgage debt than ever before, leaving them extremely vulnerable to downturns and interest rate hikes. Real estate has become a drag on growth, as every dollar tied up in an overvalued property is a dollar that isn’t invested in productive businesses and innovation. Among OECD countries, Canada already lags on R&D spending and productivity metrics. Domestic brain drain is already underway in Ontario, as even relatively well-off educated professionals must flee to find affordable housing elsewhere. These escapees often unwittingly bring the problem with them to new provinces and rural towns, where smaller markets strain to absorb demand from newcomers with deeper pockets. What used to be dismissed as a Toronto and Vancouver problem is now demonstrably a nationwide crisis. We’re becoming a country for rentiers at the expense of skilled workers, youth, and entrepreneurs—bleeding talent and quality of life.

How did we get here? As with all prices, it starts with supply and demand; when there is too much demand relative to supply, prices rise. Indeed, for years Canada has had both the highest population growth rate and the lowest per-capita stock of housing in the G7. Then, during the pandemic, monetary policy poured cheap money into the economy, while a savings glut emerged among luckily employed high earners. Demand for assets accelerated, deepening the crisis.

If this were all, policy prescriptions to lower prices would be straightforward: increase supply, decrease demand. Yet unlike prices of other necessities, policy seems committed to keep housing prices moving in only one direction. Policymakers react to high food and energy prices with alarm, yet hail rising home values as evidence of a strong economy. Landlords and real estate professionals agree, equally chipper about high rents (tenants, not so much). Politicians speak of “cooling” hot prices, but never dare suggest an outright reduction. Since a majority of Canadian households own their principal residence, the financial interests of this voter base command political deference. The bigger picture becomes clear: all of our incentives currently treat homes as a wealth vehicle first, and a place to live second. There is an inherent contradiction between wanting affordable housing and wanting high home values; we can’t have it both ways. Thus, tackling this crisis requires recognizing that trade-offs will have to be made, and the entire policy apparatus built up around housing needs fundamental long-term reform. Rebalancing supply and demand would indeed stabilize prices in the short-term, but it would require a paradigm shift to keep them that way.

It is worth underlining that no other investment is treated quite like housing. There is no crown corporation to facilitate and insure extremely leveraged securities trades, the way the CMHC does for mortgages. Beyond registered savings accounts, there are practically no capital gains tax exemptions for other assets, the primary means of wealth-building for those priced out of homeownership. If a business owner successfully lobbied the government to ban their competitors, people would be outraged by such naked state favoritism; yet homeowners frequently cow city halls to impede nearby developments in the name of “protecting” their property values. One can hardly even blame them, since many homeowners were encouraged to violate the golden rule of investing—diversification—by relying primarily on this one highly leveraged and illiquid asset for retirement and credit. Both direct and indirect subsidies for homeownership have flowed from governments for decades, billed as promoting the Canadian Dream, while renters have become sidelined entirely, too often treated like income streams rather than people. All of this contributes to a situation where there is little will to reduce property values, and exuberant faith in housing-as-investment. Approximately ten percent of Canada's GDP comes from residential real estate (valued at over 300 percent of GDP), so we are hitched to this wagon. There will be no painless way off.

The causes of this mess have policy roots going back decades, and redressing them won’t happen overnight. The solutions will require unleashing private sector builders while coordinating all levels of government to use their distinct sticks and carrots. Most fundamentally, progress will require a sea change in our incentive structure, from one that treats housing primarily as a wealth-building asset to one that recognizes housing as a basic human need. Achieving this doesn’t require blind utopianism; it requires simple economics, clear-eyed policies, and—most importantly—a firm decision that we want to do it.

Addressing Demand-side Issues

The demand side of the equation must be tackled first, since constructing new supply takes time. Furthermore, the major driver of high demand is an influx of speculative “investors” who can snap up new supply as fast as it comes. The Bank of Canada reports that investors now make up at least 19 percent of nationwide homebuyers, while Statistics Canada suggests investors buy one third of new homes in Ontario and a whopping 43 percent in BC. Negative real interest rates combined with unprecedented price appreciation means properties can be vacant or cash-flow negative and still be seen as good places to park money. Those who already own homes are able to borrow against their equity to buy more, while first-time buyers simply seeking a place to live are forced to give up and face exorbitant rents. When people do this with concert tickets or hand sanitizer, we call it scalping, or price-gouging; with housing, we call it “investment.” Singapore offers an attractive model for dealing with this. Successive residential purchases come with increasing surtaxes and mortgage-to-income limits. Canada could also add minimum down payment requirements to this mix. Irrespective of interest rates, this makes hoarding supply costlier upfront and limits systemic debt risks. An additional 30 percent nationwide foreign buyers’ tax and outright ban on short-term rentals would prioritize supply for domestic buyers and tenants. While such a blanket “Airbnb” ban may not be appropriate across Canadian cottage country, Vancouver’s new requirements that hosts be licensed and limited to renting from their principal residence are worth adopting in our other most supply-choked cities. Cutting off speculator demand in the short run will make it easier for supply to catch up while also realigning incentives to ensure housing is secured first by those who need it the most. Idle money, wherever its source, should be taxed out of the market, while productive money should be carefully distinguished and incentivized.

Another way to achieve this is through a Land Value Tax. By taxing the underlying value of land but not any improvements on top, the LVT punishes speculators seeking to ride effortless appreciation from the location around them, incentivizing landowners to provide density or value to their parcels. It could be designed to replace or offset existing property taxes, with grandfather-clause exemptions to protect current fixed-income owners and other vulnerable-yet-legitimate land uses. LVTs are widely popular among economists of all stripes due to their efficiency, but the political clout of landowners makes enactment difficult.

Greater transparency in the market is desperately needed to root out shady activity. A recent expert panel investigation was shocked by the brazenness of money laundering in the BC property market, totalling billions of dollars and contributing to at least five percent higher local home values. Regulators could close loopholes and commit greater resources to the RCMP, CRA, and other investigators to support efforts to chase bad money out of the market. Finally, governments should resist the urge to subsidize purchases, even for first-time buyers, as this only fuels appreciation further.

The Supply Side of the Problem

Maintaining abundant supply of both saleable and rentable units is crucial to ensure affordability is maintained long-term, even while cities grow. In markets with abundant supply, the quality of a unit or landlord can command higher prices and rents than those determined solely on intrinsic scarcity, leaving everybody better off.

We must start by recognizing that despite Canada’s overall abundance of land, our largest cities are functionally islands: Montreal, quite literally; The GTA, Ottawa and Hamilton, due to greenbelts; Vancouver, due to mountains, water, and the American border. This means the amount of land they can build on is constrained. A large share of Canada’s population lives in these centers, which also represent the bulk of our economic and immigration growth. Aside from this, the environmental and economic costs from car-centric sprawl are too great to be allowed to continue unabated. Therefore, cities must grow up to expand supply, not out.

With proper planning, densification need not sacrifice resident comfort or urban beauty. Paris is denser than New York, yet Paris also has strict height limits on buildings. The common misconception that there is no middle ground between cramped skyscrapers and sprawling suburbs is largely a product of domestic zoning laws which all but mandate these two typologies. Building the kinds of mid-rise, walkable developments that make European cities so charming and healthy is illegal in vast swaths of Canadian cities: 62.3 percent of Toronto’s residential land is zoned for detached single-family houses, while in Vancouver—where land is far scarcer—this number is a perverse 80.5 percent. These bans are largely upheld by NIMBY (Not In My Backyard) activism. Municipal councillors receive immense pressure from constituents to block denser developments in their neighbourhoods, while the voices of the people who would have liked to live in them—and the money they would have brought to the local economy—are left unaccounted for.

Relaxing zoning to allow densification is the first step to dramatically expanding housing supply. Since jurisprudence holds municipalities are “creatures of the province,” provinces have broad authority to overrule municipal red tape. In addition to issuing ordinances to speed up particular developments, provinces should pass across-the-board legislation to ban single-family zoning, legalize rooming houses, and fast-track permitting for multiplex construction in any existing residential neighbourhoods without community consultation. This “gentle density” approach would instantly multiply the accommodation potential of suburbs, without even noticeably impacting their built character. Denser mid-rise zoning should be enacted across urban areas, especially those well-serviced by transit. Swapping mandatory parking minimums for maximum allowances in these areas would greatly reduce construction costs, with the added benefit of reducing congestion, pollution, and car dependency. Provincial governments and the federal government can pressure municipalities to take the lead on these reforms by making funding for infrastructure projects contingent on them.

Crucially, upzoning should not just be limited to a few neighbourhoods; it must be applied broadly across entire cities at once. This is because exclusionary zoning not only limits the number of units that can be occupied, but also the amount of land that can be developed in the first place. Since developers compete with each other for land, and sellers typically want the highest offer, existing owners have lots of power to determine prices, and thus the profitability and character of new construction. Upzoning a lot of land at once effectively creates a larger pool of potential sellers, forcing more competition to secure buyers. The resulting downward pressure on land prices gives developers wider margins to take risks on more diverse projects and consumer bases. Coupled with existing-tenant protections, increasing the stock of developable land would also slow gentrification displacement by dispersing capital over larger territories and timelines. While upzoning may spike land values short-term, this gets netted out in unit values (what matters to end-users) when land costs are divided by the denser new unit count.

Not all people should be expected to buy in order to be financially secure; rental supply must also expand to address tight vacancy rates. While purpose-built rental construction has recently gone up, more can be done to hasten the trend.

Right now, rental apartment development is tax disadvantaged; the exemption from HST/GST collection on residential rents means that developers cannot recoup the sales taxes paid on construction or operational inputs from their rents after occupancy. Developers also must pay a sales tax on the appraised value of a new rental building before selling it. Providing tax credits to offset these costs would make rental construction more profitable and attractive. It would also push down rents, since developers need less income to earn back their costs. Another strategy would be to defer capital gains taxes on rental developments if the money is reinvested into building more rentals, creating a production feedback loop. In general, subsidies to reduce construction costs help lower the sticker price when units hit the market. Additional subsidies for upfront costs of sustainable construction practices would also help new supply contribute to Canada’s climate targets.

Getting our house in order

Even in a free market, people recognize that some things are so important to human flourishing that they require special policies to ensure fair access. The prices of energy, food, drugs, health care, and countless other markets are heavily regulated this way; it’s long past time to count housing among them. There is nothing inherently wrong with profiting from housing, but incentives should ensure that profits reward adding value, not merely passive ownership and induced scarcity. A system which too heavily privileges owners over renters leaves the latter open to abuse, and all but ensures a zero-sum mentality about housing. A “Canadian Dream” that requires excluding Canadians is not worth dreaming of.

Oscar Wilde quipped that “a cynic is a man who knows the price of everything, and the value of nothing.” Our way out of this crisis starts by remembering the true value of homes beyond the sale price. Ensuring that incentives put people first will make everybody better off, even financially. To fix Canadian housing for good, we must stop treating it like a piggy bank, and start treating it like housing.


About the author

Philippe FournierPhilippe Fournier holds a Bachelor of Architectural Studies from the University of Waterloo and is currently pursuing his Master of Architecture degree at McGill University. He has worked for architecture firms in New York, Toronto, Vancouver and Kitchener. His research interests include environmentally sustainable building practices and economics.

MAX Policy

MAX Policy is a collection of provocative ideas and policy solutions generated by the minds at the Max Bell School of Public Policy.

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