Deregulate housing

Unbridled home-owning has become the single biggest threat to Canada’s economic stability.

By Lawrence Solomon

Unbridled home-owning has become the single biggest threat to Canada’s economic stability.

Bank of Canada governor Mark Carney may have to raise interest rates on all Canadians to stop a potentially catastrophic housing bubble, even though higher interest rates could abort our still-shaky economic recovery. Prime Minister Stephen Harper and the provincial premiers should stop him, not by telling him how to do his job but by doing their own jobs and setting the distorted Canadian housing sector aright.

Canada’s housing sector — far from operating on free-market terms — has been a creature of federal industrial policy since the 1930s, when Ottawa passed the Dominion Housing Act to subsidize housing, kick-start the economy and improve Canada’s social values. Home ownership, then as now, was seen by many as a promoter of social stability. In subsequent decades, the federal government added more and more subsidies to the housing sector, bringing us to the situation we face today, where unbridled home-owning has become the single biggest threat to Canada’s economic stability.

The remedy for Harper is straightforward: Rather than ignore the distortions in Canada’s housing sector and cause Carney to raise interest rates, Harper should systematically peel back the layer upon layer of subsidy that levers our giant housing market into a teetering threat. Each layer that Harper removes will not only act to strengthen the Canadian economy, it will also act to save taxpayer dollars.

The most important way to deleverage housing is a privatization or dismantling of the Canada Mortgage and Housing Corporation, the juggernaut created in the 1940s to provide housing for servicemen returning home after the Second World War. CMHC has morphed into a gargantuan agency that primarily serves to inflate the housing sector through various programs subsidized through government guarantees. Wind down the CMHC — the private sector is fully capable of performing its functions without subsidy, and without inviting taxpayer risk — and the federal government will be eliminating half a trillion dollars in housing liabilities, the type of risks for Canada that Fanny Mae and Freddie Mac visited on the United States in its catastrophic housing collapse of 2008.

But CMHC is only the largest of the direct and indirect species of subsidy trained on the housing sector. The federal government also artificially boosts home ownership through numerous tax provisions. The First-Time Home Buyer’s Tax Credit helps heat up the housing market, as does the Home Buyers’ Plan provision for RRSPs. There’s the GST New Housing Rebate. And the absence of capital gains tax convinces many to put their money down for a home.

Once in a home, the government can then be counted on to roll out programs that help keep people in them. Subsidies for energy conservation renovations have been a favourite over the years; two years ago, the federal government subsidized renovations of all kinds.

Provincial and municipal governments also use the tax system to entice people with poor credit or inadequate savings into premature home ownership — they offer property tax rebates and various incentives to first-time buyers. More often, the homeowners don’t even know that they have been subsidized, as happens through deals cooked up among the province, the municipality, and the real estate developer. These development handouts may be offered as grants or via mechanisms such as “tax-increment financing,” which assumes that a new development will incrementally raise the neighbourhood’s property values and thus property taxes. Governments then use these presumed future tax increases as justification to help the developer finance a current development that is otherwise unfinanceable.

The biggest distorter of all, however, may come from an undeclared, 100-year war that governments at all levels have waged against tenants. Prior to the Second World War, when tenants were seen as lacking hygiene, as sexually promiscuous, as disease prone, and as alcohol abusers, this war was been fought primarily through health regulations, zoning restrictions and bans on shared accommodations and apartment buildings. The taint against tenants continues today in updated form through governments that levy hidden property taxes on tenants several times higher than the property tax charged home owners, and through governments that charge tenants more for services such as garbage collection.

To boot, rent-control policies act to stream people into home ownership by discouraging developers from building new rental units or upgrading existing ones. Taken in toto, policies from governments at all levels recklessly discourage renters and recklessly encourage home ownership.

Governments don’t serve their economies by spurring housing, as the International Monetary Fund discovered in a study conducted following the 2008 meltdown, when the U.S. housing bubble played an outsize role in its greatest economic decline since the Great Depression. Of the 20 housing “busts” that occurred in various countries between 1970 to 2001, the IMF found, a recession followed in every case but one. Worse, the recessions associated with housing busts are deeper and longer-lived than other recessions, and typically lead to “output losses two to three times greater than recessions without such financial stresses.”

Neither do governments do homeowners any favours by dispensing housing goodies. The housing busts the IMF described all involved falls in housing prices of 30% or more.

The case could not be clearer for housing deregulation. If Mr. Harper and his provincial counterparts don’t deregulate, the entire economy and homeowners in particular are put at risk. If they do deregulate, Canada’s housing stock — the chief investment for most Canadians — becomes secure without needlessly dampening the Canadian economy.

Lawrence Solomon is executive director of Urban Renaissance Institute and author of Toronto Sprawls (University of Toronto Press).


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