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GTA is facing a tricky  question: can housing become affordable again?

'The major reason house prices have been going up is that there’s three buyers for every seller,' says Ivey School economist
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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. 

Talking taxes
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