Cigarettes and Housing

Steve Saretsky -

Happy Monday Morning!

We’ve talked a lot about the recent mismatch between population growth in this country and the ability to deliver enough new housing supply to not only meet demand but actually moderate price growth. Housing is all about supply and demand after all. We’ve tried to obliterate demand but it seemingly won’t go away. Here’s a short list of demand side policies in no particular order in recent years:

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  • Foreign buyer tax
  • Mortgage Stress Test
  • BC Speculation Tax
  • Empty Homes Tax (Vancouver & Toronto)
  • Rent Controls (Vancouver & Toronto)
  • Expanded Mortgage Stress Test
  • Increased Foreign Buyer Tax
  • Outright Foreign Buyer Ban
  • 400bps increase in interest rates in 12 months
  • Underused Housing Tax

Every level of government has tried to slow demand with little results. Yes some of these policies lack real teeth, and yes we did kill the high-end luxury market. The luxury market remains on life support when we told foreigners to stop sending their money over here. So while we have eliminated the foreign owned pied-à-terre, we have not actually made housing more affordable for the average Canadian, it’s actually gotten worse!

It seems obvious we must now seriously look at the supply side of the equation. If it feels like i’ve been beating a dead horse in recent months I apologize. But please consider the following.

CMHC just dropped its latest housing market outlook suggesting housing starts are on pace to total around 212,000 units in 2023 and approximately 224,000 next year, significantly lower than a pace of about 271,000 units in 2021. The projection also marks a notable downgrade in CMHC’s expectations for home construction this year, with the agency having indicated in its fall outlook last October that it expected around 244,000 housing starts in 2023.

Yes housing starts are rolling over hard, as one would expect given a near DOUBLING in the cost of financing new construction. Furthermore, how do we entice new construction in a deteriorating macro economic outlook?

Reducing development charges, speeding up approvals, and or increasing density would be one way. However, in many cases policy makers are actually doing the opposite.

Remember, last week I told you CMHC announced a 100-200% increase in their development fees on their rental construction financing program.

This week, Metro Vancouver board of directors have approved a motion to re-work its budget to ease the rising property tax burden on residents – and instead will raise development fees on new housing construction instead.

Meanwhile, in Ontario the taxing of new homes has gotten so out of control it now accounts for about 30% of the cost of a new home! Here’s an example from The Canadian Centre for Economic Analysis which shows that if a new home in Ontario costs $940,000, then 288,000 of it is taxes. Insane.

Source: Canadian Centre for Economic Analysis

Common sense suggests if you want more of something you incentivize it through lower taxes, and if you want less of something (hint: foreign buyers) you tax it. Yet in Ontario new homes are the most taxed sector in the economy.

Source: Canadian Centre for Economic Analysis

So long as we continue to tax housing like cigarettes we should not expect much to change. Hopefully we figure this out soon or this housing crisis will persist, leaving most of society worse off.

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The Saretsky Report. December 2022