Across the country, first-time homebuyers are getting more anxious about the market they’re facing.
A new survey from Royal LePage and mortgage insurer Sagen conducted in February and March found nearly two-thirds of Canadians who bought their first home within the last two years had feared missing out on a property they were eyeing, simply because the down payment it needed was too high. In Toronto, that anxiety ran higher still at 75 per cent, and it had only increased since the last survey in 2019.
Market data gives a glimpse at why: Last month, aggregate home prices, including condos, in the Toronto area were 33 per cent higher than in April 2020. They rose even faster in the 905 where detached house prices climbed 44 per cent year over year to an average of $1.31 million. Like other city regions around the world, the GTA is facing a tricky question: can housing become affordable again?
There isn’t a simple answer or silver-bullet solution, experts agree. Affordability challenges are “part and parcel of being a global city: the bar is very high,” said Robert Hogue, a senior economist at RBC. But he and others pointed to approaches that could bring home ownership a little more within reach.
In a nutshell: New taxes could deter people from buying second homes, but experts say caution is needed to ensure they don’t backfire and make the problem even worse.
Can taxes help redistribute the wealth that’s currently tied up in real estate? That discussion was pervasive in the run-up to the recent federal budget. The Liberals chose to tax offshore owners of vacant homes, a levy that already exists in Ontario and British Columbia.
That kind of tax is “low-hanging fruit,” says economist Mike Moffatt of the Ivey School at Western University. Others questioned why the federal vacancy tax only applied to foreigners, and called for it to more broadly target empty homes regardless of ownership.
Moffat believes that policies that deter “hoarding” of homes are good overall. While some buyers might consider the vacancy tax simply a cost of investing, others might rent out the home.
But Moffatt warned that a capital gains tax on a principal residence — something floated prebudget — could deter owners from selling, inadvertently shrinking the number of listings on the market. “The major reason house prices have been going up is that there’s three buyers for every seller,” said Moffatt.
He thinks raising property taxes might be more effective than a vacancy tax to bring in revenue and chase away speculators.
Allowing homeowners to defer the higher tax until they move out solves the problem of residents whose principal properties have increased in value over time.
James McKellar of York University’s Schulich School of Business agrees that property taxes are “incredibly low.” But he also favours more direct government intervention in building new housing.
“Taxing is kind of tampering at the edges,” he said. “In the long run, governments have to rethink their role in providing for housing where the markets just won’t do it.”
The power of zoning rules
In a nutshell: Requiring affordable units in new developments can open up neighbourhoods to more residents with lower incomes, but experts say the rule should apply more widely — and be accompanied by broad increases in density.
Later this year, city staff are expected to unveil their final recommendation on new rules that would require housing developers in certain parts of Toronto to set aside a given amount of affordable homes for each new development.
It’s an approach known as “inclusionary zoning.” Though many experts believe it’s a tool that could help affordability, several think Toronto’s pitch could be much toothier — in part, because a provincial decision has restricted the use of these rules to the immediate areas around major transit stations.
Jeremy Withers, a U of T PhD candidate whose dissertation focuses on inclusionary zoning policy, wants to see the rules apply to smaller buildings than what is being proposed — 100-unit sites downtown and near the water, or 140-unit sites elsewhere.
Another zoning change that’s been suggested to boost affordability is adding more density to residential areas. A report last year showed that about 70 per cent of Toronto neighbourhoods only allowed detached homes. But Withers and others cautioned that simply boosting the number of allowed units, or up-zoning, doesn’t ensure the units will be affordable.
Scott Leon, a researcher with the Wellesley Institute, urged officials to look at inclusionary zoning in tandem with broader plans to up-zone neighbourhoods to pack the biggest punch.
Homes are in short supply
In a nutshell: Building more supply should make housing more affordable, but you’ve also got to build the right kind of homes in neighbourhoods where people want to live, say experts.
RBC’s Hogue says supply is a “huge factor” in housing affordability — but having enough housing in the city isn’t simply a matter of adding more units. The city is hurting for a wider range of homes, beyond just small condos or detached houses, he added.
That’s the idea behind up-zoning: to add options like stacked townhouses, triplexes, fourplexes, and secondary suites.
Having more mid-level options could “reduce upward pressure” on strained portions of the market, said Stephen Brown, senior Canada economist for Capital Economics.
When more mid-range options become available, more people may drop out of the race for traditional single-family homes, said Queen’s University professor David Gordon.
That’s important, because Toronto just doesn’t have enough space to accommodate everyone in stand-alone properties, he said. “We’re going to get past this idea that the only home that’s appropriate for raising a family is a big, detached house on a suburban lot,” he said.
Hurdles go beyond zoning, RBC’s Hogue cautioned, noting that factors like higher development charges can result in more expensive homes. Politically, officials may consider how neighbourhood changes could frustrate current constituents — and therefore feel some pressure to keep the status quo.
In discussing supply, Withers said a hard look should also be taken at where demand is originating — specifically, a look at the impact of investor purchases on overall affordability.
Interest rates and speculation
In a nutshell: Low interest rates and repayment rules for home equity lines of credit have made it easier for homeowners to buy income properties, adding an element of speculation into the market. But those low rates are also helping Canada recover from the pandemic.
One of the chief factors in pushing up home prices has been the rock-bottom interest rates that the Bank of Canada has signalled will be with us for at least another year.
The cheap cost of money has enabled many consumers to become property investors, using their home equity to buy second properties and introducing an element of speculation into the housing market, said John Pasalis, president of the Toronto real estate brokerage Realosophy.
It’s particularly tempting to buy pre-construction homes that give buyers a lead time in payments while condos are being built, he said.
But, as with all markets, there is risk in housing, Pasalis cautioned. You only have to look as far back as 2017 when suburban home prices dropped 20 per cent.
So those low interest rates that are being used to help the country recover has the ironic effect of also keeping home prices soaring, something the central bank says it is monitoring carefully.
Schulich’s McKellar says it may be time to consider more rigorous repayment rules for home equity lines of credit that are financing second homes — making it mandatory that borrowers pay down the principal, as well as the interest.
“Homeowners that have been in their homes 10 or more years use them as ATM machines. They leverage that equity and buy another property and all they have to do is service the debt.”
He notes that those second-home investments have helped boost the supply of rentals in the city since Ottawa stopped incentivizing the construction of purpose-built apartments in the 1980s. But McKellar says that landscape is changing as some development incentives are appearing again and low-interest construction loans are at long last goosing the purpose-built apartment supply.
Another idea would be to require a higher down payment on second properties, said Ivey’s Moffatt. “Maybe we’d only have two buyers for every home on the market instead of three or four.”
Take another look at mortgage insurance
In a nutshell: If the federal government spent all mortgage insurance revenue on housing programs, it would boost the supply or create grants or tax incentives that could make housing more affordable. But it doesn’t eliminate the need for the mortgage insurance program to underwrite the banks’ lending risks.
Canada’s mortgage insurance program has contributed billions to the public purse since 1954 — far exceeding Ottawa’s housing assistance programs, said U of T housing expert David Hulchanski.
What many home buyers are surprised to learn, however, is that the system is designed to protect the banks, not them. So a homeowner who suffers a financial crisis is still vulnerable to losing their home, although this rarely happens in Canada.
Still, changing the system might cause more problems than it solves if Canada suffers a major housing correction, said Moffatt.
The mortgage insurance system was set up to require a 20 or 25 per cent down payment to ensure buyers wouldn’t just walk away from their homes, he said. Based on statistics from Canada Mortgage and Housing Corporation, that works.
McKellar doesn’t think tweaking the system would impact affordability much. But he questions why buyers are guaranteeing banks’ loans: “Surely in today’s world they can underwrite those in a more efficient way.”
Tess Kalinowski us a Toronto Star reporter, Victoria Gibson is a federally funded Local Journalism Initiative reporter at the Toronto Star