The federal Liberal government’s proposed budget includes an innovative plan to improve housing affordability through “shared equity” mortgages. First-time homebuyers could qualify for a 10-per-cent “shared equity” mortgage on Canadian Mortgage and Housing Corp.-insured financing for new houses and five per cent on existing houses. In addition, the maximum Home Buyers’ Plan (HBP) tax-free RRSP withdrawal limit would be raised $10,000, making down payments easier to obtain.
In reality, there’s little the federal government can do to improve housing affordability. Housing and land-use regulation are the biggest factors in affordability; those are responsibility of provincial, regional and municipal governments.
So the benefits of the federal government’s measures are likely to be modest, at best. For example, the increased RRSP withdrawal is equal to only six months of the average house-price increase since 2000. Between 2000 and 2015, average house prices increased about three times the increase rate of incomes.
Nor can material benefit be expected from shared-equity mortgages. The shared-equity mortgages would be available only to first-time-buyer households with annual incomes under $120,000. The CMHC mortgage limitation would further restrict the maximum mortgages to $480,000. RBC Economic Research expressed concern that the shared-equity program would further increase demand, without “addressing housing-supply gaps.” This would drive house prices even higher.
Shared-equity mortgages would be even less effective in the Vancouver and Toronto CMAs, where most house prices are too costly for a $480,000 mortgage.
Housing drives cost-of-living differences between metropolitan areas. In the U.S., differences in housing affordability account for 85 per cent of inter-metropolitan cost of living differences. Such data are not readily available in Canada, but are likely to be similar.
Construction costs are not the problem. While Vancouver and Toronto have somewhat higher construction costs, nearly all of the housing affordability difference compared to other CMAs is in land-related prices.
The Vancouver and Toronto housing-affordability crises have developed as their regional governments developed some of the most restrictive land-use policies in the high-income world. Most significantly are “urban-containment” limitations on the use of urban fringe land for new housing (as in Ontario’s “green belt”). This has increased demand, in the largely fixed area in which construction is permitted, while severely putting a lid on the supply of land for development.
Consistent with economics, this has dramatically increased the price of land and thus the cost of housing. The result is that there is no middle-income affordable land, which is needed to build middle-income affordable housing. At the same time, land prices where development is permitted are largely driven by prices on the urban fringe, which is consistent with economic theory.
The same dynamics have been observed in other international markets with urban-containment policies, such as Sydney, Melbourne, Auckland, San Francisco, Portland and London.
Moreover, denser, high-rise housing offers virtually no help. In Toronto, condominium prices have risen strongly and are now higher than detached house prices were a decade ago, even after adjusting for inflation. In Vancouver, condominium prices are nearly equal to detached house prices 10 years ago. This does not take into consideration the smaller size of condominiums compared to houses. Moreover high-rise condominiums provide no yards in which children can play, which makes them less family-friendly.
The average detached house in Vancouver averages about $1.5 million and in Toronto about $1 million. Needless to say, few young, middle-income families with children would be able to afford these prices, with or without new measures in the federal budget.
Meanwhile, the cost-of-living crisis is spreading, as fleeing households drive up demand and house prices in nearby, similarly regulated CMAs. In the Greater Golden Horseshoe around Toronto, prices have escalated substantially in CMAs such as Hamilton, Oshawa, Kitchener-Waterloo, Brantford and Barrie. Near Vancouver, house prices in Victoria and Kelowna have risen strongly in recent years. House prices in Victoria have risen to near Toronto levels.
Solving Canada’s housing affordability crisis will require provincial, regional and municipal action. It must start with addressing the price of land, which is the proximate cause of both the housing affordability and cost-of-living crises.