Four Critical Housing Policies That Every Party Missed

Demand is high & prices are surging in many markets in Canada. This may seem good to some.?

Others feel priced out of their cities, concerned about affordability, & as if they may never have an opportunity to own a home.

As with any issue, be it economics, health, trauma, it’s important to get to the underlying cause.?

Canada’s housing reality does NOT stem from the following:

• Greed of the Rich
• Irresponsible Lending Practices
• Lack of Government Regulation?

Home ownership is important to Canadians & the popularity of real estate investing as a retirement strategy is growing. Record immigration numbers year over year only accelerates both these drivers.

The underlying cause driving price increases & affordability issues is that there is not enough supply to meet the demand in the market.

We cannot tax our way into increased housing supply.

Below is a breakdown of several proposed government policies that WOULD result in:

1. A Surge of Housing Supply Immediately
2. Increase Affordability for Canadians Home Owners without driving prices up
3. Increase Affordability for Canadians Renters
4. New Opportunities for First-Time Buyers to Enter the Market unlike anything proposed before

Throughout the article we will continue to return to these key themes: Supply, Affordability, Opportunity.

Supply: Increasing Inventory in the Short Term

There is no short term solution to a deeply entrenched problem. When a marathon runner begins a race, they will sprint to separate from the pack, once they’ve established positioning they will continue at a healthy pace. Canada is so far behind on supply that it would require a surge of listings before we even begin to think about pacing ourselves.

Here’s how you create a surge of supply in the form of real estate listings:

Government Policy #1:

Capital Gains Tax Exemption for Anyone who Sells in a Designated 1-year Period

Goal: Increase inventory drastically for home-buyers

We hear our government floating ideas like a potential capital gains tax on the sale of primary residences, this is the opposite of that.?

Doing the opposite of what is suggested by those who got Canada into this situation would make logical sense.

How it Works: This policy would designate a 1-year window where anyone in Canada could sell a property they are holding as an investment and be fully exempt from incurring any capital gains tax. This would be a once in a lifetime opportunity for investors to off-load property and avoid capital gains tax.

Why this is Important: There is little incentive to sell investment properties. After Realtor Fees, Legal Fees, Mortgage Penalties & Capital Gains Tax you are often left with LESS money than you’d have available if you simply borrowed funds against the property in the form of a mortgage or Home Equity Line of Credit to then re-invest.?

While you borrow those funds you continue to gain appreciation, pay down mortgages, claim depreciation, etc. Selling is often financially detrimental, this one-time exemption changes that.

With a significant lift in listings, prices would calm, level out, or could even decrease depending on the asset class.

Improving Affordability for Home Owners & Renters

Government Policy #2:

$20,000 Cash Incentive for new Secondary Suites created & rented at affordable prices

Goal: Increase inventory of affordable rental units, while helping homeowners with ownership & construction costs.

Lack of inventory is affecting the rental market as well. This makes saving up for a down payment even harder.

The government isn’t capable of providing affordable housing.?

The liberal government pledged $1 Billion towards affordable housing in September 2020 to create 3,000 Affordable housing units. That would cost taxpayers $333,333 per individual unit created.?

(Source:https://www.cbc.ca/news/politics/liberals-motels-hotels-billion-1.5733424)

The costs associated with this proposal are reckless. I will outline how we can generate affordable units for less than 1/10th this cost.?

Here’s how it works: Set designated affordable rent prices for 1 & 2 bed rentals in each city. Offer Canadian homeowners a $20,000 rebate for legal units created & rented at the designated affordable prices for 1 year. If we contrast this to our trusted government's proposal, $1 Billion would create 50,000 affordable rental units, which is 47,000 MORE affordable units then the 3,000 proposed for the same cost above.

The Result: A surge of affordable rental units available. Mortgage assistance for homeowners, improving affordability. Financial assistance for rising renovation costs. Keep this program in place long term and watch Canadians help each other and themselves at the same time.

Improving Affordability without Increasing Prices

Government Policy #3:

35 Year Amortizations for both Insured & Uninsured Mortgages w/ new Stress Test

Goal: Improve monthly affordability for homeowners

Time to further address affordability through our federally regulated lending guidelines. Extending the allowed Mortgage Amortizations to 35 years for both Insured & Uninsured mortgages would decrease payments for Canadians and improve affordability.

This is a sensitive line, because mortgage approvals ratios work off of monthly income vs. monthly costs. If we reduce the monthly costs by extending the allowed amortization from say 25 to 35 years, Canadians will qualify for larger purchase prices.?

Sounds good right? Not so fast, if everyone qualifies for higher prices, that will drive up prices and recreate the same problem.?

This is why I suggest stress testing the amortizations to improve monthly affordability without increasing the amount one qualifies for & pouring figurative gasoline on an already hot housing market.

Here’s How it Works: Increase amortizations on insured mortgages from 25 to 35 years, and Uninsured Mortgages from 30 to 35 years. However, still qualify borrowers using a stress test based on the original amortization limits of 25 & 30 years.

Currently a $500,000 Purchase Price w/ 5% down at a 2% interest would yield a monthly payment of $2091. With a 35 year amortization this payment would drop to $1634

Providing Opportunities to Priced Out First-Time Buyers

Government Policy #4:

First-Time Buyer Incentive to put 5% down on a Rental Property

Goal: Give First-Time Buyers Opportunity to Enter affordable Markets while working in expensive cities

A salary of $99,873 makes you a top 10% earner in Canada. This salary qualifies for a maximum price of $500,000 with a minimum down payment & zero debt.

The Average Home Price in Canada is $716,000. Toronto & Vancouver, where the majority of those top 10% jobs are located have average prices in excess of $1 Million.

This is the disconnect.?

Although no one is entitled to own property in an internationally recognized city like Toronto or Vancouver, the former is intended to paint a picture.

While many are buying expensive homes without top 1% incomes, their time in the market allows them to leverage large equity positions in their homes when upsizing.

But what about the 19 year olds today? How can we help them eventually enter an increasingly challenging market?

How it Works: Allow First-Time Investors a one-time option to buy an investment property with only 5% as a down payment.

The Result: Canadians have the chance to enter markets they actually CAN qualify for, without the burden of saving up a 20% down payment which is required for a rental property. Canadians can begin building equity sooner and begin to keep pace with the markets around them. First Time Buyers priced out of cities like Toronto can invest in tertiary markets like Sudbury, Sarnia, Windsor, etc.

Conclusions

Taxation does not help supply, in fact it encourages investors to hang on to property they would otherwise like to sell.?

Incentivizing the public to create affordable housing supply is 10X more cost efficient and helps both owners and renters.

Measures to improve affordability for homeowners are irrelevant if said policies simultaneously drive price increases.

Helping our youth enter the market with Rental Property Ownership is an untapped approach with huge upside.

This is not a catchall article. I didn’t touch on construction regulations, zoning, incentives for private builders, burdensome taxation etc. Those are also relevant items to explore.

One thing is clear, the “leadership” of all parties seems incapable of addressing these issues. The ones who do have a clue need to involve themselves.?

If you found this valuable, please share this article, tag your local MP, MPP, City Counsellor, News Station, etc. and let’s get meaningful ideas that could help out in the public.

About the Author: Jacob Perez is a Real Estate Investing & Mortgage Expert. He was recently named one of the 63 Rising Stars who represent the future of the Mortgage Industry by Canadian Mortgage Professional Magazine. He has been investing in Ontario Real Estate for 8+ years. His writing has been featured on publications like Realtor.ca, Millennial Money, etc.

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