Unintended Consequences
Has the government unintentionally added fuel to the housing market?
One of the bigger talking points going into the 2021 federal budget was the need to cool Canada’s housing market. Economists from multiple banks were actually encouraging the federal government to put new policy in place that will tame speculative investment in Canadian Real Estate.
The government reacted by implementing a 1 % annual tax on non-resident owners holding vacant properties. A policy that is unlikely to have any impact on the market as the number of non residents holding vacant properties is insignificant. The government’s ability to identify and enforce the new regulation will also be very cumbersome.
Additionally, in April, The Office of the Superintendent of Financial Institutions (OSFI) revealed changes to the stress test to take effect June 1, 2021. The proposed changes would see the qualifying rate for all uninsured mortgages to be the greater of their mortgage contract rate plus two percentage points, or 5.25%. It’s estimated that this proposal would reduce purchasing power for uninsured borrowers by somewhere between 4% and 4.5%. On the average Toronto home, this change could reduce eager Buyers spending by $40,000 – $50,000.
However, the government spending in other areas could unintentionally add further fuel to the housing market in the interim. For instance, let’s take the government’s decision to lower daycare costs. As a parent of two who as recently as 5 years ago was paying $2,500 a month for daycare, I expect making childcare more affordable for young parents is something most Canadians can get behind. It’s easy to see the good this policy could do: help with inequalities, allow parents to get back into the workforce easier and free up more cash in their monthly budgets.
It could also further fuel the housing market. Putting mortgage-size payments back into the pockets of young Canadian families could further drive up home prices. This is a segment of the population who are often eager to purchase or upgrade their housing needs. The government has to expect some of this funding to funnel into the housing market and consider its implications of putting more pressure in particular on suburban and rural real estate.
If interest rates are on the rise in the midterm, the policy move could also provide some financial breathing room at a time young Canadians need it most. Helping to stabilize house prices if rates do rise, avoiding a crash scenario many fear.
The Liberal government’s recent deficit forecasts seem to indicate that they have bought into Modern Monetary Theory of Economics (MMT). A newer economic policy that encourages the government to spend on social initiatives. Identifying that unlike households, sovereign governments with their own money supply are not restricted by budgets because they can simply input more money into the economy, and their only guiding restriction is inflation.
Whether you are an advocate or a critic of MMT, 2020 showed us that government spending can lead to housing appreciation under the most unexpected conditions. Despite falling rents and bleak economic conditions caused by the pandemic, low interest rates and government support programs, led to record price appreciation for Canadian housing. The Government’s plan to run record deficits for the foreseeable future means that funds are going to be funnelling somewhere. While it’s no guarantee that funds will continue to flow into housing, further inflation in housing is a potential outcome as the spending spree continues.
