13The federal government’s budget last week focussed heavily on the housing crisis with a buffet of items to supposedly address both housing supply and affordability.

The key components:

  1. A two-year moratorium on foreign purchase of Canadian properties;
  2. A $4 billion fund to assist municipalities to accelerate the housing development approval process;
  3. A tax-free Down Payment Savings account of up to $40,000 for first-time homebuyers under 40; and
  4. $1.5 billion to assist in the construction of co-operative housing and a further $1 billion for “affordable” housing.

Will these measures have a significant effect on housing supply and affordability?

“Much ado about nothing,” said a business analyst (quoting the famous Shakespeare line), when interviewed by one of our major TV networks.

Some analysts I’ve listened to have been slightly more generous; most warn against getting your hopes too high.

Prime Minister Trudeau, Finance Minister Freeland and the Housing Minister Hussen, along with Jagmeet Singh (who claims considerable credit for the measures), of course, extoll their merits. But they’ll never give more than vague answers about what is expected to be accomplished, only claiming that, collectively, they should have somewhat of an effect.

What’s my take?

First, if the money spent on increasing housing supply through stimulus 2 and 4 above actually increases supply (which is questionable; there are no details), then that should suppress price increases. It’s as simple as the law of supply and demand: Increasing supply lowers the price.

Second, if the tax-free down payment account (TFDPA) increases demand for housing, it should have the opposite effect. Again, the law of supply and demand: increasing demand increases prices.

So, will the two opposite pressures offset each other? Who knows? But if they do, the combination should have no effect on price escalation. But, if there really is an increase in supply, a few more Canadians might get into home ownership—especially those who have saved up the $40,000 in their TFDPA.

Except that, who will be the ones benefitting the most from that program? It’s easy to say “Everyone.” Surely, with the tax write-off, it will be easier for almost everyone to save up a down payment more quickly. But it’s likely that the ones who need it the least–those with higher incomes–will be most able to take advantage of the program. They are the ones most able to put money away in the first place, and also most incentivized to do so by the higher tax brackets they are in. And, typically more financially educated, they’re usually best positioned to take advantage of such opportunities.

Still, if that upper echelon of first-time homebuyer under 40 takes advantage of the program, it may have a ripple effect lower down and, at a minimum, increase the rental opportunities (and affordability) for those less able to take advantage.

Realistically, though, how much of an effect can a $40,000 tax free account have? With the standard 10% down payment (5% downs being reserved for stellar candidates), that will still only get you a small condo in the Lower Mainland at today’s prices. Will it still get you a small condo “X” years from now when you have saved up those $40,000? What if it takes $50,000 by then? You’ll still have to wait until you’ve saved up another $10,000 without the tax break (and, who knows, by then it might take $60,000)

What about the moratorium on foreign purchases? On the surface, it sounds like it should retard price escalation by reducing the competition for properties when they come on the market (or, at least shifting it from foreign buyers to Canadians who have saved up their hard-earned money, perhaps through the TFDPA).

But hold on! The program doesn’t allow you to do that within two years. With a maximum of $8000 per year, it will take five years for the first tax-free $40,000 of your then required $??,000 to be saved.

Furthermore, experts suggest that the foreign buyer component, though perceived to be a significant factor in escalating housing prices, is really a very minimal factor (I’ve seen numbers such as 1%), and that the harsh measures already in place against foreign ownership in provinces like BC have done almost nothing to curb rising prices. It was this measure, in particular, that prompted the “much ado about nothing” comment by the Wharton School of Business analyst.

So, while I see all these measures as having a very tiny effect over the long term, the result will be minimal. And they will have come into place about a decade later than they should have. But isn’t that the way of government: to finally address an issue after “the horse is already out of the barn,” as the saying goes?

What will have an effect on housing prices? Rising interest rates, to be sure. The ¼% rise in March already retarded demand. And today’s further ½% jump should amplify that effect. Add the further 1 – 1¼% that economists are predicting over the next year as the country grapples with inflation, and fewer people will be able to afford mortgages, forcing price moderation.

It will have a perverse effect, though, in helping ordinary Canadians get into housing. I’m confident that the increase in the mortgage payments required to service those higher-interest mortgages will be greater than any proportional drop in housing prices. Many fewer Canadians will be able to qualify for mortgages despite the price dampening.

Wrestling inflation will not make housing more affordable for Canadians, nor will increasing interest rates facilitate an increase in housing stock.

The analyst who claimed this was much ado about nothing may not have been too far off the mark.

But there is a real solution that the government seems to have missed.

That will be the topic of my next post.