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Housing

Trudeau’s 2024 budget could drive out investment as housing bubble continues

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7 minute read

From LifeSiteNews

By David James

The extent to which the Canadian economy is distorted by a property bubble can be seen by comparing government debt with household debt, with the latter being 130 percent of GDP, nearly twice as much as American households.

Prime Minister Justin Trudeau’s federal government has brought in its 2024 budget, which projects C$53 billion in new spending over the next 5 years. It includes a significant capital gains tax increase, which some are warning will drive away investment, and a plan for more government-controlled public housing.

The Trudeau government is wrestling with a problem that is afflicting most English-speaking economies: how to deal with the consequences of a 20-year house price bubble that has led to deep social divisions, especially between baby boomers and people under 40. 

House prices have tripled over the last 20 years on average, fuelled by the combination of aggressive bank lending and, until recently, falling interest rates. Neither is directly controlled by the federal government. There is no avenue to restrict how much banks lend and the Bank of Canada sets interest rates independently.

Accordingly, the Trudeau government is left to tinker at the edges. It will legislate an increase, from one half to two-thirds, in the share of capital gains subject to taxation for annual investment profits greater than C$250,000. The change will apply to individuals, companies and trusts.

Christina Freeland, Canada’s minister for finance, claimed improbably that only 0.13 percent of Canadians with an average income of $1.42 million are expected to pay more income tax on their capital gains in any given year. 

That is a dubious forecast. The average house price in Canada 20 years ago was C$241,000; it is now C$719,000. Any Canadians who bought an investment property (family homes are exempt) before about 2015 are likely to have a capital gain larger than C$250,000 should they sell. 

The government’s claim that the change will only affect a tiny proportion of Canada’s population is also belied by the government’s own forecast that the tax change will raise over C$20 billion over five years.

The extent to which the Canadian economy is distorted by a property bubble can be seen by comparing government debt with household debt. Canada’s government debt is fairly modest by current international standards: 67.8 percent of GDP in March 2023, down from 73 percent in the previous year. That is about half the U.S. government debt and half the average for G7 countries. 

Canada’s budget deficit is also cautious by Western standards. In 2023-24 it was C$40 billion, equivalent to 1.4 percent of GDP. The U.S. budget deficit is currently over 6 percent of GDP.

Investors account for 30 percent of home buying in Canada, and about one in five properties is owned by an investor. Worse, the enthusiasm for property investment seems to be intensifying. According to one survey, 23 percent of Canadians who do not own a residential investment property say that they are likely to purchase one in the next five years, and 51 percent of current investors say that they are likely to purchase an additional residential investment property within the same time frame.

The problem with the bias towards property investment is that it is actually a punt on land values – and land is inherently unproductive. Business groups have criticized the government’s capital gains hike as a disincentive for investment and innovation, but the far bigger issue is investors’ focus on property, which is crowding out interest in other kinds of investments. 

That means the main source investment capital for businesses will tend to come from institutions, such as mutual funds, which typically have a global, rather than local, orientation.

Faced with forces largely out of its control, the Trudeau government is fiddling at the edges. It has announced the introduction of what it calls “Canada’s Housing Plan”, which is aimed at unlocking over 3.8 million homes by 2031. Two million are expected to be new homes, with the government contributing to more than half of them. This will be done by converting underused federal offices into homes, building homes on Canada Post properties, redeveloping National Defence lands, creating more loans for building apartments in Ottawa, and looking at taxing vacant land.  

The initiatives may have some effect on supply and demand, but the property price excesses are mainly a financial problem caused by unrestrained bank lending that has been fuelled by low interest rates. When a correction does occur, it will most likely be because of changed global financial conditions, not government policy or fiscal changes. 

There are other measures that could be taken to address the property bubble such as reducing, or removing, negative gearing or more heavily taxing capital gains only on property but not other types of investments. But these policies would no doubt would be politically unsalable, so the Trudeau government is instead making minor changes, probably hoping that the problem will fix itself.

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Economy

One Solution to Canada’s Housing Crisis: Move. Toronto loses nearly half million people to more affordable locations

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From the Frontier Centre for Public Policy

By Wendell Cox

The largest CMA, Toronto, had by far the most significant net internal migration loss at 402,600, Montreal lost 162,700, and Vancouver lost 49,700.

Canadians are fleeing overpriced cities to find more affordable housing. And restrictive urban planning policies are to blame.

Canadians may be solving the housing crisis on their own by moving away from more expensive areas to areas where housing is much more affordable. This trend is highlighted in the latest internal migration data from Statistics Canada.

The data covers 167 areas comprising the entire nation, including Census Metropolitan Areas (CMAs), which have populations from 100,000 to seven million. It also includes the smaller Census Agglomerations (CAs), which have a core population of at least 10,000, as well as areas outside CMAs and CAs in each province and territory, which are referred to as “largely rural areas.”

Long-standing migration trends have been virtually reversed. Larger cities (CMAs) now see the highest loss of net internal migrants, while smaller cities (CAs) are experiencing solid gains. Between 2019 and 2023, Canada’s CMAs lost 273,800 net internal migrants to smaller areas, including CAs and largely rural areas. This contrasts sharply with the previous five-year period (2014 to 2018) when CMAs saw only a 1,000-person loss.

So, where did these people go? A significant portion – 108,100 – moved to CAs, which captured 39 per cent of the CMA losses. This is triple that of the previous five years (2014 through 2018).

However, the most notable shift occurred in largely rural areas, which gained 165,700 net internal migrants, representing 61 per cent of CMA losses. This is a dramatic increase compared to the 33,700 net loss in the previous five years.

Among the 167 areas, the migration data is stunning.

The areas experiencing the greatest net internal migration are outside CMAs and CAs. The largely rural area of Ontario saw the biggest gain, with a net increase of 78,300 people – nearly 40 times the number from the previous five years. Meanwhile, rural Quebec placed second, with a net gain of 76,200 people, more than 10 times the increase in the prior five years. The Calgary CMA ranked third (and first among CMAs) at 42,600, followed by the Ottawa Gatineau CMA (Ontario and Quebec) at 36,700 and the Oshawa CMA at 34,900.

The largest CMA, Toronto, had by far the most significant net internal migration loss at 402,600, Montreal lost 162,700, and Vancouver lost 49,700. Outside these CMAs, nearly all areas posted net gains.

People have also started moving to the Maritimes. The Halifax CMA tripled its previous gain (21,300). In New Brunswick, Moncton nearly quadrupled its gain (7,000). Modest gains were also made in Fredericton and Saint John as well as in Charlottetown in Prince Edward Island.

Meanwhile, housing affordability in Canada’s largest CMAs has become grim. Toronto’s median house price to median household income has doubled in less than two decades. Vancouver’s prices have tripled relative to incomes in five decades. Montreal’s house prices nearly doubled relative to incomes over two decades.

These CMAs (and others) have housing policies typical of the international planning orthodoxy, which seeks to make cities denser. In effect, they have declared war against “urban sprawl,” trying to stop any material expansion of urbanization. These urban containment policies, which include greenbelts, agricultural reserves, urban growth boundaries and compact city strategies, are associated with the worst housing affordability. Land prices are skewed upward throughout the market. Demand continues to increase ahead of incomes, but the supply of low-cost suburban land, so crucial to controlling costs, is frozen.

Regrettably, some areas where people have fled are also subject to urban containment and housing affordability has deteriorated rapidly. Between 2015 and 2022, prices in Ontario CMAs London, Guelph, Brantford and St. Catharines have about doubled. BC’s Fraser Valley and Vancouver Island have seen similar increases. Those moving to these areas are ahead financially, but the rapidly rising house prices are closing opportunities.

There are proposals to restore housing affordability, though none tackle the urban containment policies associated with the price increases. Indeed, we have not found a single metropolitan area where housing affordability has been restored with the market distortions of the intensity that have developed in Toronto, Vancouver and Montreal (not in our Demographia International Housing Affordability report or elsewhere). Such markets have become unsustainable for most new entrant households because they cannot afford to live there.

Housing is not a commodity. Households have varying preferences, from ground-oriented housing (detached and townhomes) to high-rise condos. Indeed, a growing body of literature associates detached housing with higher total fertility rates. According to Statistics Canada, Canadians have favoured lower densities for decades, a trend that continued through the 2021 Census, a trend that continued through the 2021 Census, according to Statistics Canada.

With governments (virtually around the world) failing to maintain stable and affordable housing markets, it’s not surprising people are taking matters into their own hands. Until fundamental reforms can be implemented in the most expensive markets, those seeking a better quality of life will have no choice but to leave.

First published in the Financial Post.

Wendell Cox is a senior fellow at the Frontier Centre for Public Policy and the author of Demographia International Housing Affordability.

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Housing

Poilievre will cut sales tax on new homes under $1 Million saving tens of thousands

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From a Conservative Party of Canada news release

In a video released Monday, Conservative Leader Pierre Poilievre has announced a plan to lower the cost of a new home’s worth under $1 million dollars.

Poilievre says a conservative government will axe the sales tax on new homes sold for less than $1 million.

That would cut the cost of an $800,000 home by $40,000 or a $500,000 home by $25,000.

Accordingly Poilievre says this will lead to the building of an extra 30,000 new homes every year.

The news could get even better as the PM hopeful says he’ll push provinces to drop their sales tax as well.

Poilievre plans to use money set aside in the Liberal’s Housing Accelerator Fund which he says has been ineffective.

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