Sky high real estate prices, bidding wars, and bully offers have many Canadians asking about housing market solutions in this country. Recently, Rob Carrick and Erin Anderssen from the Globe & Mail sent out a Tweet asking Canadians to weigh in on potential solutions. I decided to add my two cents. Below is a copy of what I wrote.
Central banking: the elephant in the room
Raise interest rates. In the short term, the central bank should raise interest rates. There is no question the root cause of the Canadian real estate fever is record low interest rates and super cheap debt.
Modify the Bank of Canada’s interest rate setting methodology. Longer term, the central bank needs to reconsider the inputs it uses to set interest rates. A myopic focus on CPI and consumer price inflation misses the broader picture. Residential real estate is an asset like a stock or bond but it is also a good people “consume”. Furthermore, the price of homes and the debt associated with it has a significant impact on the cost of living making residential real estate something of a consumer price inflation input. New Zealand’s central bank is looking into this; I think we should too.
It is publicly known the Bank of Canada has a 2% consumer price inflation target. In addition to this target, they should consider balancing that against publicly stated numerical targets around: Year on year residential real estate price appreciation versus income growth. Median national mortgage carrying costs divided by median national incomes. Average house hold debt divided by average family incomes.
Remove the Bank of Canada as a market participant. The mandate of the Bank of Canada should be modified to entirely remove the central bank as a market participant. This means no more mortgage bond buying programs, asset purchases, and quantitative easing. The concept of mortgage bond buying, asset purchasing, and quantitative easing is not at all capitalist or free market oriented. By running these programs, the Bank of Canada is distorting market mechanisms. It is effectively the central bankers saying “we are capitalist but only if prices go up.” This misses the importance of gain AND loss in a capitalist society.
I suspect the actions of the central banks are the primary driver of what is happening in real estate. Therefore, the focus should be on modifying the inputs they use to determine interest rates and removing them as market participants. Many of the housing market solutions proposed below will likely be less effective than the central bank measures outlined above.
Privatize the Canada Mortgage & Housing Corporation (CMHC) and make banks bear the risk of the loans they write without an implicit government backstop. This would probably have a huge impact as it would remove a significant source of moral hazard and distortions to market price making. If the CMHC is privatized, the government would no longer be implicitly backing the mortgage market. In turn, banks would truly bear the risks associated with the loans they wrote. I have no doubt their lending criteria would tighten up. Banks would engage in far more due diligence and take underwriting much more seriously if they actually bore the risk associated with the mortgages they wrote.
Like their central banker cousins, here the private bankers claim to be capitalist… so long as they don’t carry the risk of loss. This would be one of the most effective housing market solutions the federal government could implement.
Tighten mortgage lending terms on primary residences. The current down payment amount of 20% should be increased to 25%. Any move which makes debt less attractive and equity more attractive is a move towards a more economically stable society which is less prone to financial crisis.
Tighten mortgage lending terms on secondary residences and investment properties. New regulations requiring a 50% down payment on second homes and investment properties would likely remove some speculative buyers from the market and help cool prices.
Shorten amortization windows. If amortization windows were shortened from 25 years to 20 years it would likely cool the market somewhat and help families avoid over leverage.
Remove interest deductibility on rental properties. The tax code should be changed and the ability to deduct the interest charged on money borrowed to purchase a rental property should be abolished. This would reduce one advantage speculative buyers and secondary home buyers have when bidding in the housing market versus people trying to buy somewhere to live.
Local governments, provincial governments, and developers
Increase single family home supply. In the short run, this would not help much, but longer term it would probably help a lot. In places like Ontario this means opening up parts of the Greenbelt around Toronto for development.
Increase the supply of 4- and 5-bedroom condos and convert office space into these condos. Covid has reduced the need for office space but increased the need for homes with multiple bedrooms. If a couple with two kids now work from home, they now need 3 bedrooms for themselves in the kids and two offices to work from. Meanwhile there is a ton of empty office space; rezoning and developing these buildings into livable space again seems like a win-win. This could work well everywhere but particularly in cities like Vancouver and Victoria. This is because these cities are constrained by geography and can’t expand out like the Prairie cities.
The real estate industry
End closed or blind bidding. The closed bidding process, which prevents other buyers from knowing what other offers are worth, should end and be replaced with an open and transparent process so other buyers can see what is being offered. This would return the market to more of an auction house style system.
Adjust how real estate agents are compensated. Real estate agents shouldn’t have their pay scale with higher prices given their workload doesn’t increase. Above a certain amount (say $750,000) a real estate agent’s pay should be the same regardless of if the house is sold for $750,000 or $7,500,000. Without a change like this, agents will remain incentivized to get the highest dollar possible regardless of which side of the trade they are on.
Improve pricing data transparency. MLS shouldn’t be the keeper of all historic data. They have a monopoly in this regard and it is anti-competitive and anti-capitalist. Historic pricing data should be in the public domain so other organizations can compete more easily with MLS.
Other actions that could help cool the market but I would not be in favour of
Significant limits to immigration. I would not support this because it would have large impacts on the labour side of our economy. Canada’s demographics are such that our healthcare and pension systems need more relatively young people. Moreover, many of the people coming to this country are often coming from authoritarian regimes or places where there are few opportunities. The more people who live in a place of relative political freedom and relatively high prosperity the better. Canada can offer that to many of the world’s people.
A primary residence tax. I would not support this because for many it is their only significant asset.
A ban on foreign buyers. I would not support this because for some buying property is a stepping stone to becoming a permanent resident. Moreover, I hope we continue to present ourselves as a welcoming nation to those abroad.
Increase RRSP withdrawal limits. I would not support the government increasing the RRSP withdrawal limit because RRSPs should be strictly used for retirement. This program also adds more fuel to the housing fire. Instead, I would be in favour of removing this program entirely.
If high house prices and housing market solutions are on your mind let the Globe & Mail know. In addition to that, consider contacting your MP, MPP, or municipal politicians. The scale of the housing problem in Canada is significant and will require all levels of government, changes at the central bank, and changes to the real estate industry as well. Happy house hunting, selling, or watching from the sidelines and paying ever higher municipal property taxes.
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