Sask Party and NDP Offer Misguided Housing Policies: Look to Houston and Atlanta

Commentary, Housing Affordability, Steve Lafleur (historic), Uncategorized

The Saskatchewan Party and the NDP have released substantive housing policies. Both parties want to provide subsidies to home buyers, while the NDP also favour subsidies to home builders. These approaches are flawed.  Rather than attempting to use subsidies to reduce the cost of housing, the government needs to focus on the underlying factors that determine housing price: supply and demand.

On the face of it, providing a tax credit to help first time home buyers pay for the administrative cost of purchasing their first home is appealing. After all, there are benefits to home ownership, and young people often find it hard to save enough money to buy their first home. Unfortunately, there are unintended consequences that come along with this type of policy. Since first time home buyers know that they are entitled to a tax credit, many will be able to bid higher on homes. So long as the extra amount they bid is less than the credit they receive, they are better off. However, this has the effect of raising the overall housing price level. A study of the $8,000 first-time home buyers tax credit the United States government offers found that home prices declined around $15,000 after the program expired. In other words, the credit put so much upward pressure on the housing market that people who rushed to buy while the credit was still in effect wound up effectively spending an extra $7000. Equally as important, people in the housing market who didn't qualify for the credit paid $15,000 more than they would have paid otherwise. The only people who would have gained from this program are people who sold their houses to rent or to move to another country.

The only good thing that can be said about the Sask Party's $1,100 first-time home buyers tax credit is that it probably isn't big enough to do too much damage, although there is also a $750 first time home buyers federal tax credit. Nevertheless, putting upward pressure on a housing market already experiencing rapid price increases will reduce affordability.

The NDP's housing policies, while similar, are worse. Instead of a tax credit, which only applies if the purchaser has tax liabilities against which to apply the credit, they have pledged to give outright grants to home buyers. This means that first time home buyers receive the credit regardless of income. The grant is also bigger, at $2000. The combination of these two factors would drive home prices higher than the Sask Party plan.

As if subsidies to home buyers weren't bad enough, the NDP also wants to subsidize home builders. They plan to rebate provincial sales taxes on the construction of homes under the price of $280,000. This plan demonstrates a profound ignorance not just of the real estate market, but how the price system works. Prices aren't set by the cost of inputs. They are determined by how much people are willing to pay and able to pay for goods and services. Home buyers simply won't pass on the savings from the tax rebate if buyers are willing to bid higher. The rebate would amount to a giveaway to home builders. Hardly a 'progressive' policy.

Instead of trying to subsidize housing, the province should work with the cities to ensure that their regulatory frameworks allow for the market to meet housing demand in a timely fashion. Other than rare circumstances, high housing prices are due to regulations that impede the housing market. Regina and Saskatchewan have seen housing prices increase since the boom started, but that doesn't imply that growth has to come with high housing costs. Houston and Atlanta have had two of the hottest economies in the world since the 70s, but haven't had serious problems with housing affordability. Indeed, Atlanta is ranked as the most affordable city with over 1 million residents in the English speaking world. Houston is ranked 15. The median housing prices are $129,400 and $160,600 respectively, compared to Regina and Saskatoon at $213,000 and $277,000, respectively. Houston and Atlanta have benefited from some of the most sensible housing regulations in North America, and from an abundant supply of land. There is no reason for Regina and Saskatoon not to emulate their success.