Interest rates stay the same—so do hot housing prices

Normal folks are shut out of Canada’s housing market



From the September/October 2015 issue of the magazine.


To cut or not to cut? That truly was the question and Bank of Canada governor, Stephen Poloz, answered this morning by maintaining the bank’s overnight target rate at 0.5%.

The Bank of Canada announcement this morning that rates will remain the same is meant to send a message: That our nation’s economy is clearly not out of the woods, just yet.

If Poloz had lowered interest rates today, for a third time this year, the cut could’ve boosted exports and challenged other countries to push their currencies lower. Instead, it signals that we are still struggling economically—and it will probably add fuel to the debt-binge fire.

And why not? Put bluntly: it’s expensive to buy a home in Canada right now. But it’s not how much our homes cost that should concern us—it’s how out-of-reach home ownership has become for many Canadians.

In the last 15 years house prices have risen 127%—nearly 50% since 2006 alone. Some salt for that wound? In the late ’90s, the average house price was $154,620, five times the average income at the time. Today, the average home goes for $379,725, and it now it takes 7.8 times the current annual salary to buy it. Ask someone house-shopping in Vancouver or Toronto, where the average home now costs more than $1 million, and they’ll tell you it’s worse. Much worse.

“There’s no question that in Canada we are in a real affordability crisis right now,” says John Andrew, a professor of urban planning at Queen’s University. When large segments of the population feel they’re missing out on the dream of home ownership, then we have to concede it’ll take more than higher salaries to correct our housing problem.

Many of the usual stop-gap solutions have surfaced. Social housing proponents press for more rental units, arguing that many Canadians would be better off staying out of the market entirely. That may be true, but it doesn’t quite address the issue. Others would rather inflate mortgage rates to slow price increases, or raise minimum down payments required. But higher rates only further erode affordability, while increased down payments hurt those struggling the most: first-time buyers.

Then there’s the idea that a foreign-ownership tax could help cool the housing sector, a theory based primarily on the research of UBC geography professor David Ley, who found that well-off immigrants and foreign real estate speculators have a “trickle-down effect” that helps inflate prices in all housing market segments. This doesn’t mean a foreigner-go-home tax is the right way to go, but Ley is right to criticize our government’s lack of action. “In other countries there is a much more active attempt to respond to the shelter needs of the citizens,” he told the CBC in May. So, what will help? There are other tools in the government’s belt that aren’t being utilized.

Build family-sized condos. One of the biggest contributors to rising home prices is a lack of land. It only makes sense that developers and municipalities now look up rather than out when adding new housing stock—a shift that starts with new zoning and amended building laws. The idea isn’t new, but it works. In 2005, the Ontario government created a plan that put an emphasis on urban densification. Developers, motivated by profit, maximized this plan by building mostly smaller one- and two-bedroom units, which are not suitable for growing families.

To change this, however, requires government intervention. How do we know? Because in the ’80s, Ontario was hit with a different type of housing crisis: rapidly appreciating rental rates due to a scarcity of new rental units. The province stepped in, exempted new rentals from rent control and gave builders tax incentives to build purpose-built rental buildings. It worked—and with a greater supply of units in the market, rental rates dropped and stabilized.

Tax housing, not income. There’s another option to slow the steady march of housing prices, but I promise you won’t like it. We don’t currently pay tax on the profit earned from the sale of our primary residence. We do, however, pay progressive tax on the income we earn—and Thomas Davidoff, an economics professor at Sauder University, sees a real disconnect with this.

He uses himself as an example. In 2009 he bought a North Vancouver home, which he thought was overpriced. After three years his family decided it wasn’t the right neighbourhood for them and put the house on the market. The sale put an extra $400,000 in Davidoff’s pocket—and he didn’t pay a dime in taxes. “I was wrong about prices, wrong about future value, and I was still rewarded for my dumb luck,” he says. He compares this to his professional life, where he spent the better part of 10 years completing a bachelor degree, then a master’s degree, before finishing his PhD in economics. Today, Davidoff pays the government $0.42 in tax on every dollar he earns. “Getting my PhD damn near killed me. Why is my dumb luck rewarded but my hard work penalized?”

Davidoff suggests the federal government tax capital gains made on the sale of a property. The tax could be also be progressive. “The U.S. allows homeowners to shelter some gains, but taxes all profit above a certain threshold.” More important is what a new tax structure would do to affordability. By taxing property profits, you reduce the number of speculators and real estate investors who help to inflate housing prices. Of course, “these changes are politically challenging,” says Davidoff, “Homeowners are a politician’s biggest voting block.”

Still, those elected to political office need to take initiative—and put housing affordability for the many before the political aspirations of a few. To do nothing would mean we accept that $1 million for an average home is the new norm in Canada.


2 comments on “Interest rates stay the same—so do hot housing prices

  1. We sold my primary residence, house after all expenses, lawyer fees, H.S.T., real estate commission etc. for 1,022,548 here in Toronto. We paid for it in 1992, $325,000 which gave us a net capital gain of $697,548.

    This may seem like a big net capital gain but percentage wise, it is not that great considering and comparing what I could invested in 1992. I calculated that is was a 5.1034% compounded over these 23 years.

    The real benefit is we lived in house and saved paying rising rent over these 23 years deducting of coarse, property taxes, maintenance, repairs, utilities, insurance etc. and it is income tax free capital gain since it is our primary residence.

    However, if it was for investment purposes, there were 10% government strip bonds that in 23 years would be worth $2,910,148 in 2015. This is why we decided to max out our RRSP’s, TFSA’s which we neglected to contribute over many years having $110,000 RRSP, $82,000 TFSA contribution room.

    We took the $1,022,548 and invested in various, long term government strip bonds at 3.51% and will mature be worth $2,918,407 in 30.4 years. This will give us total compound interest of $1,895,859 or $62,363.78 per year.

    Looking at Canada’s demographics and mature, slower, growing economy, real estate prices in Canada will not grow that much over the long term. At this time, with one of the longest and highest rising Canadian real estate prices and Canadian real estate market, even the Bank of Canada is stating that there is real possibility of a 30% overvaluation plus others are stating 10% to 25% overvaluation as well, TD, Capital Economics, Moody’s, FItch etc. etc.

    CIBC in a 2007 report said that Canadian housing prices would double in 20 years but since there was already a big jump in Canadian housing prices since 2007, probably about 50%, this will likely mean a doubling in 25 years from here or 2.33 times in 30.4 years.

    This works out to a 2.81% annual increase but factor in all the expenses, income taxes, property taxes, utilities, insurance, maintenance, repairs, lawyers, fees, real estate commission. H.S.T. etc., this will push this down. Even with rental income, returns adding up to a total 3.0% to 3.5% are not worth the extra hassles, risks.

    If we see a Japan style crash in real estate in 25 years now prices are 40% to 65% lower still, then us generating $62,363.78 annual compound interest will look very pleasing.


  2. Taxing the sale of principle residences shouldn’t happen and it’s not likely to happen. Here’s why:

    It shouldn’t happen because any rise in the value of your home is nothing more than keeping up with inflation. If you sell your home $1,000,000 in order to buy another home down the street for $1,000,000 you are NOT the recipient of some massive benefit, you are simply keeping up with inflation. A tax on that gain would force most sellers out of their neighbourhoods, unless they are trading down. An unreasonable expectation in my opinion.

    And it’s not likely to happen because a tax on the gain in the value of principle residences would likely need to be accompanied by a write-off of the mortgage interest on principle residences, which would likely mean a net reduction in total revenue to the government.

    And besides, this tax already exists in places like BC where the govt did a work around by calling it a property purchase tax (PPT) and making the buyer pay it! Buy a $1,000,000 home in BC and you can look forward to paying $19,000 in PPT, $19,000 that would otherwise be available to pay to the home seller.


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