This article was originally published in the Financial Post on August 5, 2020. 

The Canada Mortgage and Housing Corporation is giving $250,000 to Generation Squeeze, an advocacy organization for young Canadians, to research ways to improve housing affordability. The group stated it will focus on “wealth generated by rising home values,” which incited fears that the government is considering a home equity tax on the capital gains generated when Canadians sell their homes.

But more taxes won’t increase affordability. If the government really wants to know why housing is unaffordable, it could have saved the $250,000 and looked in the mirror.

Governments at all levels drive up the cost of housing in two ways: by restricting the housing supply, and by increasing housing costs through taxes and fees.  

The CMHC defines housing as affordable when “it costs less than 30 per cent of a household’s before-tax income” which includes rent or mortgage (principal and interest) payments, property taxes, and other home bills.

In large urban centres across Canada, the average mortgage payment represents 44 per cent of income. Canada’s least affordable cities include Toronto (57 per cent) and Vancouver (69 per cent), where it can take over 31 years to save for a mortgage down payment.

The price of housing increases when demand from population growth outpaces supply. Toronto became the fastest growing metropolitan area in Canada and the United States in 2019, growing by 127,575 people in a single year while only 102,000 homes were added in the three years prior (since 2016).

Instead of addressing the suffocating regulations which restrict supply, governments have instead focused on red herring policies to suppress demand, such as targeting foreign buyers.

Ontario’s non-resident speculation tax collected a meager 156 payments in Toronto in the first quarter of 2019, while the city expects to grow by 41,000 people per year. Foreign buyers are a drop in the bucket. Vancouver’s foreign buyer tax also failed.

“We’re using demand tools to fight supply issues,” said Benjamin Tal, Deputy Chief Economist at CIBC World Markets.

Governments could increase supply by acting promptly and reasonably on zoning matters. In Ontario, the rezoning process can take up to seven years and there’s currently a lengthy backlog including 100,000 units held up in Toronto alone.

Former premier Kathleen Wynne added to the problem by dismantling the Ontario Municipal Board that expedited the decision process. Premier Doug Ford deserves credit for Ontario’s Housing Supply Action Plan to speed the process and increase density around transit hubs.

Governments also drive up the cost of housing through taxes and fees. The Building Industry and Land Association found that some development charges in the GTA had increased by up to 878 per cent since 2004. That adds a cost of $164,500 per condo unit in Toronto.

Taxes also drive up the cost of housing. The average cost of a detached home in Toronto is currently $1.52 million. Land transfer taxes will add nearly $54,000 to the price. Property taxes will cost another $9,138 this year and more next year.  

Renters also need affordable housing. Rental vacancy rates below three per cent cause rents to increase. Toronto and Vancouver vacancy rates are below one per cent, and the cities have a rental deficit of 9,100 and 3,800 units respectively.

Rent control discourages the development of purpose built rentals, which represented only six per cent of the 48,000 new rental households developed in Toronto from 2011 to 2016. Economist Assar Lindbeck described rent control as “the most efficient technique presently known to destroy a city – except for bombing.” Governments should instead incentivize the development of purpose built rentals by reducing development charges and taxes.

A home equity tax would be the latest example of politicians using housing as their personal ATM. Taxpayers must understand the true cause of the housing affordability crisis to fix it. Government is the reason housing is unaffordable, and more taxes will only make things worse.