A Likeability Problem: The Housing Crisis and Inflation

The American subprime mortgage crisis, which contributed to the 2007-2008 Global Financial Crisis, was triggered by the collapse of a housing bubble and led to a significant decrease in the price of US houses.  While the crisis was global, it left Canadian home prices relatively unscathed, as the two graphs below show:  

Canadian housing prices showed a slight dip in 2008, before recovering and continuing their upward trek, dwarfing those of the American market.

These increases cannot be placed solely at the feet of the Liberals as Conservative governments held power from 2006 through 2015.  However, the failure of the Liberals to solve the problem makes this a major political issue that demands attention as highlighted by a recent Abacus Data poll:

While the affordability of housing sits at number three, it is inexorably linked to “The rising cost of living” and “The economy” which sit at number 1 and 4 respectively.  Conservatives are leading in the polls, and Canadians do not believe Liberals can fix any of these issues, however, they are not assured of a majority government and therefore must find a way to bring fresh thinking to these problems.

“It’s the economy stupid.”  While the “people vote with their wallet, not their mind” mantra may not be true at all times, polls seem to indicate that it may be the case during the next election.  The Canadian economy, in terms of real GDP growth, has lagged behind that of the US during 5 of the first 6 years of the present Liberal government. 

This is not an argument that Conservatives should run on a promise to “fix” the economy as that is too broad of an issue. Instead, Conservatives should focus on inflation and the housing crisis as they remain the two most important economic issues.

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Inflation

While high inflation has many possible causes, including supply chain problems, high energy prices from the war in Ukraine, and labor shortages, Canadians are less concerned with the origins than they are with inflation’s impact on their lives.  The failure of the Liberals – and their junior partners, the NDP - to solve the problem presents Conservatives with a weakness that they must exploit.

To date, the Liberal strategy consists of interest rate hikes combined with a grocery rebate and the Climate Action Incentive payment (Carbon Tax rebate).  “Giving” citizens money is in line with the left’s efforts to highlight their likability (the NDP also blame corporations which is in line with their socialist foundations).  There are at least three issues with this “free” money approach that the Conservatives must emphasize:

1. Rebates aren’t “free” - In both instances,  the rebates are from taxes taken from the public in the first place.  Rebates also cost more than they return.  Public Service salaries account for approximately 15% of government expenditures, meaning the government has to tax citizens $1.18 for every $1.00 it returns in rebates. 

2. Rebates aren’t for everyone – “Rebate” is a fancy word for transfer payment, and like every transfer payment, they do not benefit everyone but instead take money from some people and give it to others.  The Grocery rebate is tied to income levels while the Carbon Tax rebate varies depending on the province. 

3. Rebates don’t reduce inflation – Inflation remains, so what is the plan?

Returning money to citizens is not a bad idea but a better approach would be not to take it in the first place.  In times of economic uncertainty, taxes should be reduced allowing citizens to cope with rising prices and prioritize the spending as they see fit rather than leaving it to the decision of bureaucrats.  Pierre Poilievre, the leader of the Conservative Party, has been touring the country recently promising to “Axe the Tax.” 

Resistance to cutting the carbon tax should be expected from environmentalists.  However, given that “climate change and the environment” sits in 5^th on the list of Canadian concerns, now would seem to be the time to do it.  Returning money to the pockets of Canadians would also help address the second major concern, housing affordability.

Housing

The rising cost of homes has been an issue for at least two decades and Canadian housing prices are not just high against those in the US but also compared to G7 nations.

The approach of parties on the left remains more government involvement.  Recently, Trudeau was in Hamilton, announcing that the federal government would spend $45M to “build and fix 224 rental units” while the city will pitch in another $19.1M.  Building housing is good.  Research has shown that one of the main causes of the rise in housing costs in Canada is that homebuilding has not kept pace with population growth.

However, considering that Canada needs to build an additional 500,000 houses per year until 2030 to bring housing back to an affordable level, Trudeau’s recent announcement would cost the government approximately $100 billion per year.  Government-funded construction is not a feasible “solution”, but it does create the illusion that the Liberals are “doing something” and advances their goal of being likable.  Clearly, the government is not the best entity to build houses.  The West spent 40 years during the Cold War proving that state-directed economies pale in comparison to market economies and now is not the time to forget that lesson.  There is a role for government, but it is in providing incentives, not directing or financing construction.  Conservatives should focus on:

• Tax incentives/penalties

  • Incentives - Providing tax breaks to individuals and corporations committed to building affordable housing.  One possibility would be to provide home builders with a multi-year waiver on either property taxes or taxes on profits, allowing builders to recoup their investments quicker and keeping rents lower by reducing landlord costs.

  • Penalties – Charge corporations and foreigners a higher tax rate if properties are vacant for longer than 1 month.  This would disincentivize these groups from building investment properties that sit empty. 

• Eliminate Bureaucratic Barriers –In Vancouver, where I live, the average approval time for a construction permit is 15 months, about the average for major municipalities in Canada.  The impact of construction delays on industries' ability to create housing is concerning however far more concerning is its impact on prices.  A recent study by the C.D. Howe Institute estimates that “the price of single-family detached housing in Vancouver was $1.3 million more than the cost of producing the same house in a market without excessive regulatory barriers.”

Modifying tax rules is well within the power of the federal government so selling this concept to voters should be simple and presents a quick win for Conservatives.  Reducing or eliminating bureaucratic red tape presents a more difficult challenge, however, a focused analysis of the permitting processes of the most expensive and largest markets resulting in recommendations to municipal governments would be a logical first step.

I have saved what is arguably the third rail of Canadian politics for Part IV of my analysis, immigration.