2023 federal budget submission
What the federal government can do about the housing shortage
The federal government has been running public consultations on the upcoming budget. I sent in a submission with some suggestions for what the federal government can do about the housing shortage.
The big problem is now supply constraints
For many years, the major challenge facing the Canadian economy has been inadequate demand, requiring loose monetary and fiscal policy (low interest rates, higher-than-usual deficits) to stimulate demand and create jobs. This is no longer the case. For the first time since the 1970s, the economy is facing shortages and inflationary pressure.
In this situation, we need to identify and relieve constraints on supply: the more we can increase supply of the things people need and want, the less interest rates need to rise to match demand with supply.
Prices reflect scarcity. Housing being expensive is bad news, not good news
One of the most obvious shortages is housing. The GTA and Metro Vancouver have suffered from housing shortages for years: people move there because the jobs are there. Prices reflect scarcity, so both rents and home prices have gone way up. As Mike Moffatt describes it, prices in the GTA were at a slow boil before Covid hit, and then they exploded. Suddenly a lot more people were working from home, and they needed and wanted more space at home. Thus Covid resulted in a sudden increase in total demand for residential space. Remote work also means that demand for housing in less expensive places, like Montreal and Halifax, has also jumped.
This is a terrible situation, not least because there’s tremendous political tension over who should have access to the limited supply of housing: between current residents and newcomers, renters and landlords, homebuyers and investors, or even younger renters and older homeowners.
The shortage is obviously bad for renters and first-time homebuyers, who face high housing costs, lowering their real incomes and pushing them out, or pushing them down the housing ladder and forcing them to live in crowded and substandard housing. And there’s no offsetting benefits for long-time homeowners, even setting aside the indirect effects (e.g. on the health-care system) of younger people being pushed out: if they want to continue living where they are, as most people do, they don’t benefit from their massive gains on paper.
As Edward Glaeser and Joseph Gyourko describe it, this is why homeowners don’t feel rich:
Housing wealth is different from other forms of wealth because rising prices both increase the financial value of an asset and the cost of living. An infinitely lived homeowner who has no intention of moving and is not credit-constrained would be no better off if her home doubled in value and no worse off if her home value declined. The asset value increase exactly offsets the rising cost of living. This logic explains why home-rich New Yorkers or Parisians may not feel privileged: if they want to continue living in their homes, sky-high housing values do them little good.
Thus federal policy should explicitly aim for more housing and lower home prices in expensive areas, where housing is most scarce. Lower home prices will not have a major financial impact on homeowners who own a single home.
The CMHC’s June 2022 report on housing shortages in Canada, the MacPhail Report (“Opening Doors”) on housing supply in BC, the Ontario Housing Task Force, and the Smart Prosperity Institute all came to similar conclusions: to bring affordability levels back to those prevailing 20 years ago, we need to build a lot more housing over the next 10 years, more than twice as much as business as usual.
What can the federal government do?
There’s four major bottlenecks to building more housing:
Economic viability. The value of the new building (limited by municipal zoning restrictions), minus all its construction costs (including municipal development charges), has to be significantly more (say 30% more) than the current value of the property with its existing building.
Rezoning. For anything other than low-density housing, the municipal government has to change the law. At this step, there’s often opposition - it’s human nature to fear the unknown.
Permitting. Even after rezoning is approved, the municipal government has to issue permits before building can begin.
Construction. This is where the bottleneck should be.
If municipal governments have control over the rate at which housing is built, what should the federal government do? The three elements of diplomacy are persuasion, compromise, and threats.
To start with compromise (carrots):
The Rental Construction Finance Initiative (RCFI) helps with economic viability by providing low-cost, long-term loans for purpose-built rental housing (which are more secure for renters than renting a condo or secondary suite). This should continue, and the process of securing funding should be streamlined as much as possible.
Another way to improve economic viability would be toremove the GST on new purpose-built rental housing, perhaps for a limited period of time (say 10 years).[This already happens via the New Residential Rental Property rebate, introduced in 2001.]
Provide incentives for municipalities to loosen constraints to building more housing. For example, major infrastructure project funding could be made conditional on allowing more housing, as happened with the Broadway Subway in Vancouver. Also see the Biden Administration’s Housing Supply Action Plan.
Mike Moffatt suggests that one rapid way to expand the housing supply would be to build more student residences for colleges and universities, as out-of-town students account for a big chunk of rental demand. For example, the school could provide a third of the cost, the province a third, and the federal government a third.
The pre-Covid National Housing Strategy (from 2017) focused on non-market housing for lower-income households. This should continue, while recognizing that this will not do much to help middle-income households, who are also facing exploding housing costs.
Persuasion:
Both ministers and MPs should consistently make the argument that we need more housing and that municipal restrictions are a barrier, especially when meeting with municipal elected officials, or when making comments on municipal decisions. Although the federal government doesn’t have the direct control over municipal governments that the provinces do, there’s still a lot of communication between federal MPs and municipal councillors.
Hyperlocal decision-making is part of the problem. The economic costs of restricting housing supply are regional and national. Thus it seems likely that it will be necessary for the provincial governments to override local decision-making, as has been happening in New Zealand, and in the US at the state level. Again, federal ministers and MPs should express their support. In response to complaints that this is undemocratic, Jerusalem Demsas points out that higher levels of government have much higher visibility and election turnout compared to municipal governments: in Vancouver, turnout is less than 40%.
Pressure (sticks):
Federal and provincial projects are not legally required to defer to municipal zoning restrictions (“paramountcy”). The Senakw project in Vancouver (59-storey rental towers on Squamish land) demonstrates that there’s tremendous unmet demand for housing in central locations, currently being suppressed by zoning restrictions (like pushing down on a balloon). If municipal governments are not willing to allow more housing, as a last resort the federal government could intervene directly, by having CMHC build dense multifamily housing in neighbourhoods where it’s most scarce and expensive.
Mike Moffatt makes one further point: we should align our population growth targets and our housing targets. The federal government sets immigration targets, and post-secondary institutions set targets for international student enrolment, while provinces and municipalities set housing targets. Right now this is happening in an uncoordinated way. Even before Covid, this led to a mismatch between population growth and housing in Ontario. After Covid and the sudden increase in demand for residential space, the need is even greater.