Raising interest rates is far more powerful than what the federal budget is delivering through its tax and spending budgets
Canada has had one of the fastest growth rates in housing prices among OECD countries since the beginning of this century. From 2001 to 2021, prices here have risen by more 375 per cent compared with 360 per cent in Australia, 270 per cent in the U.K., 226 per cent in the U.S. and 220 per cent for 33 OECD countries. Unlike the U.S., U.K. and Ireland, Canada did not have a major collapse in housing prices after the 2008 financial crisis.
It is this backdrop that made housing a key priority in last week’s federal budget. Seventeen initiatives — tinkering at best — were introduced to help Canadians cope with high housing prices. Seven focussed on supply . The remainder are policies curbing demand or boosting demand with financial support, especially for new buyers.Article content
On top of these budget policies, the federal government is hiking corporate taxes on financial institutions. And who do you think will pay those taxes? Banks will shift a good portion of the tax onto borrowers through higher interest rates that will affect mortgage costs, making housing less affordable. It will also affect homebuilders who will construct fewer homes when their financing costs rise.
Even with an admirable target to build 100,000 homes in five years through the new accelerator fund, the new supply amounts to a hill of beans. The targeted construction will be swamped by 400,000 new immigrants each year looking for a place to live, which will be 20 times the number of houses hoped to be built. Other policies will have a marginal impact on housing prices. The flippers’ tax on sales within one year will be easily avoided by holding a house longer by a month.
Housing inflation is a vexing problem in almost every country. Housing prices naturally rise when populations grow with a fixed amount of land. To keep housing prices from escalating, more land must be made available for urban expansion or limited to denser living spaces. In a free market without zoning restrictions, both will happen. Some people prefer denser housing so they can be close to work or enjoy urban amenities. Others move further away to suburbs to have more space.
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