Get government out of the business of regulating and encouraging housing. Nothing does more to hinder those who could get the job done.

By Lawrence Solomon

This is the unedited version of the opinion piece published by the Financial Post on June 21, 2024.

For the edited piece, see the publisher’s website here

Prime Minister Justin Trudeau has made increasing housing for Canadians a top priority by
committing to “the most comprehensive and ambitious housing plan ever seen in Canada.” Unfortunately, he is also committed to muddled policies that kneecap his housing goals.

Trudeau’s decision to increase the capital gains tax for individuals from 50 percent to 67 percent on gains above $250,000, and for business on all gains, demonstrates his failure to understand the complexity of markets.

The large real estate developments that Trudeau needs to increase the housing stock largely depend on the ability of residential property developers to assemble land on major thoroughfares.

Because the mom-and-pop shops on thoroughfares that would ordinarily sell their land to
assemblers would now face a crushing capital-gains tax hit, they will become reluctant to sell unless compensated by a much higher price. The delays that flow from that reluctance, and the higher prices necessary to overcome that reluctance, will often make a real estate development financially unviable.

Moreover, the new housing that eventually does get built will be costlier than otherwise, putting it out of reach for an increasing number of home-seekers.

The capital gains hike will deter investment across the board, not least in housing, where it will act as an all-purpose house-construction killer. Fearing high taxes upon an eventual sale, shopkeepers will be less likely to convert the attic above their store into a rental unit and homeowners will think twice about adding a granny flat as a rental unit. With the added tax reducing the incentive to sell, many who had considered disposing of underused second homes will now keep them off the market.

Trudeau has even been chipping away at the one great incentive that Canadians have always had for home ownership — the capital gains tax exemption for primary homes. As one example, entrepreneurs short on funds but handy with a hammer have long enhanced the housing stock by buying dilapidated houses as primary residences, upgrading or subdividing them to make them marketable for their neighbourhoods, then reselling them and moving into new homes to repeat the process.

These sweat-equity builders have now been deemed “house-flippers” by CRA and are treated worse than other businesses: They are denied not only the capital gains exemption if their upgrade produces a profit but also the ability to claim deductions if the real estate market turns against them and they are forced to sell their home at a loss.

Trudeau has also targeted would-be homeowners who planned to finance their home purchase by renting out rooms for short periods via Airbnb. Under his Fall Economic Statement, homeowners could be denied all tax deductions associated with their rentals, making short-term rentals unviable for homeowners, along with their dream of being able to afford a home.

Other federal attacks on home ownership target foreigners who would improve our housing stock through its Prohibition on the Purchase of Residential Property by Non-Canadians Act. The Underused Housing Tax on vacant homes subjects foreigners who want to provide a home in Canada for friends or family to a tax of one percent of its market value — a $1 million house faces an added annual tax burden of $10,000.

To counter all the brakes that he has been applying to the housing market, Trudeau has tried lead-footing the accelerator, such as with his 2017 $82-billion National Housing Policy designed to better house millions of Canadians. Yet since then housing costs have soared and more affordable housing units have disappeared than have been built.

The government’s response? A blizzard of new spending in its 2024 budget to be piled onto the past spending that proved so counterproductive: $6 billion for a Canada Housing Infrastructure Fund, $15 billion to top-up an existing Apartment Construction Loan Program that would be bolstered by a new Canada Builds program, $50 million for a new Homebuilding Technology and Innovation Fund “to leverage an additional $150 million from the private sector and other orders of government,” $50 million to modernize and expedite home building through the regional development agencies, $500 million to support rental housing, etc.

The public’s response? Ninety percent is unmoved; only 10 percent believes the government’s new housing budget “will help alleviate the crisis,” according to a Renters.ca poll of the federal government’s 2024 budget. That same poll found that 92 percent of renters have difficulty finding housing they can afford.

The harder Trudeau tries to boost housing, the worse the results. If he truly wants to boost
housing, he should stop trying. Nothing hinders those who want to provide housing to those who need it more than government.

A real-life experiment in what happens when government does get out of the way played out recently in Argentina, where a radical libertarian, Javier Milei, recently came to power. One month after he repealed the Rental Law, which employed rent controls to prevent rent gouging in Buenos Aires’ scarce rental market, the supply of available apartments doubled and rents dropped 20 percent. Landlords and tenants now freely negotiate rents on terms and in currencies of their choice, without benefit of government guardianship, and both thrive.

By slashing government spending and deregulating the economy, Milei also dramatically
lowered interest rates, creating a boon for homeowners. “Argentines flock to banks as Milei
awakens mortgage market,” the Buenos Aires Times reported last month. Argentina’s banks are now processing tens of thousands of loans to potential homeowners who believe that Milei’s deregulating policies will keep interest rates down and home-owning affordable.

Argentina solved its housing crisis when it realized it had too little housing because it had too much government. Canada can solve its housing crisis through the same realization.

Lawrence Solomon (LawrenceSolomon@nextcity.com) is a founding columnist of
FP Comment.