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Get government out of the business of regulating and promoting housing. Nothing else gets in the way of people who can get the job done.
Published on June 21, 2024 • Last updated 2 days ago • 4 min read
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A duplex home under construction in northwest Calgary on June 19. Photo: Brent Culver/PostMedia Files
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Prime Minister Justin Trudeau has made expanding housing a top priority, promising “the most comprehensive and ambitious housing plan in Canadian history.” Unfortunately, he is also working on a confusing set of policies that are impeding his housing goals.
Prime Minister Trudeau's decision to increase capital gains tax rates on individuals making over $250,000 from 50% to 67%, and to increase all tax rates for corporations, shows he does not understand the complexities of the market.
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The large-scale real estate development that Trudeau needs to increase the housing stock depends heavily on residential property developers being able to aggregate land along major roads. Independent merchants who would normally sell land to aggregators will now face higher capital gains taxes, which will make them reluctant to sell unless they are compensated by higher prices, making many developments economically unviable.
Moreover, any new homes that are actually built will be more expensive than they otherwise would be, putting them out of reach for an increasing number of would-be homebuyers.
An increase in capital gains tax will discourage investment in general. With regard to housing, this will discourage homebuilding in many ways. Shopkeepers will be less likely to convert the attic above their shop into a rental property, and homeowners will hesitate to build an extension to an apartment for seniors, for fear of high taxes on eventual sales. With less incentive to sell, many people who were considering disposing of underused holiday homes will not put them on the market.
Trudeau is even cutting a major incentive for Canadians to own homes: the capital gains tax exemption on primary residences. Cash-poor but hammer-wielding entrepreneurs have long bolstered the housing stock by buying dilapidated homes as primary residences, renovating or subdividing them to make them sellable in nearby neighborhoods, then reselling them and repeating the process with new homes.
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These struggling builders are now considered “home flippers” by the CRA and are treated worse than others: Not only are they denied the capital gains exemption if their renovations turn out to be profitable, they are also denied the deduction if their home sells at a loss during a real estate downturn.
Trudeau also took aim at would-be home buyers who plan to finance their purchases by renting out rooms on Airbnb: His fall economic statement warned that homeowners could be denied all tax breaks related to short-term rentals, making short-term rentals impossible for them and their dreams of buying a home impossible to achieve.
Other federal attacks on homeownership target foreigners who improve our housing stock through the Non-Canadian Residential Property Purchase Prohibition Act. The Underutilized Housing Tax would tax foreigners who want to house their friends and family in Canada at 1% of the market value of the property, meaning a $1 million home would incur an additional tax burden of $10,000 per year.
To counter all that has been done to slam the brakes on the housing market, Trudeau has tried to step on the gas by rolling out an $82 billion national housing package in 2017 to improve housing conditions for millions of Canadians. But since then, housing costs have skyrocketed and more affordable housing is disappearing than being built.
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The government's response? Budget 2024 adds a mountain of new spending to past spending that has proven hugely counterproductive: $6 billion for the Canada Housing Infrastructure Fund, $15 billion for the existing Apartment Construction Loan Program, $50 million for a new Homebuilding Technology and Innovation Fund, $50 million to modernize and accelerate housing construction through community development agencies, $500 million to support rental housing, and more.
How are people reacting? 90% are unfazed. Just 10% believe the government's new housing budget will “help ease the crisis,” according to a Renters.ca poll conducted for Budget 2024. The same poll found that 92% of renters are struggling to find housing they can afford.
The more Trudeau tries to increase housing supply, the worse it gets. If he really wants to increase housing supply, he should stop trying. There is nothing more impeding people trying to get housing to people who need it than the government.
A real-life experiment in what happens when government doesn't intervene has taken place in Argentina, where the radical liberal Javier Milley recently came to power. One month after Milley repealed rent control laws designed to prevent “rent gouging” in Buenos Aires, the supply of available apartments doubled and rents fell by 20 percent. Landlords and tenants are now free to negotiate rents on the terms and in the currency of their choice, without government oversight, and both are prospering.
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By slashing government spending and deregulating the economy, Millay slashed interest rates, benefiting homeowners. “Argentines flock to banks as Millay revs up mortgage market,” the Buenos Aires Times reported last month. Argentine banks are now processing tens of thousands of loans to potential homeowners who believe Millay's deregulation will lower interest rates and make homeownership more affordable.
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Argentina solved its housing crisis by realizing that it didn't have enough housing because its government was too big. Canada can solve its housing crisis through a similar realization.
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Lawrence Solomon (LawrenceSolomon@nextcity.com) is the founding columnist for FP Comment.
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