Pouring more Fuel on the Fire
We’ve tried fuel on this fire, how about we try water?
April 15, 2024
What to do when you have too much money chasing too few houses resulting in too few people being able to afford a place to live? According to the government’s latest announcement, they seem to think the answer is to enable first time buyers to bid even more money they don’t have on homes already selling for historic highs.
On Thursday, the Deputy Prime Minister announced that in response to a housing market so hot that few young people can afford to buy into it, the government will allow 30-year mortgages for first-time buyers that can’t afford the nominal 20% down and thus require an insured mortgage. This means that for the same monthly payment, a buyer will now be able to take out a loan $50,000 greater than they would have on the average new build.
It doesn’t take a crystal ball to understand what will happen - tens of thousands of new buyers will have 50,000 more dollars with which to bid up housing prices. Where will all this money go? Over the lifetime of that mortgage, a family will go from paying 1.1 times the principal in interest payments to 1.4 - some $200,000 more! Short term gain for long term pain.
Who would take such a lousy deal? Young buyers with little other choice. But who stands to benefit? Existing homeowners, already over-leveraged, who need a new generation to fall into the same trap to keep the value of their home rising and banks who will gladly rake in the resulting interest payments. Like the now-cancelled First-Time Home Buyer Incentive before it, in which the government gave more money for new buyers in exchange for an equity stake, this change simply throws more money on the price fire.
Such counterproductive policies are the obvious result of a profound dilemma our government seems to think it faces; how to make housing more affordable without bringing down the price of homes. With around ⅔ of Canadian households owning their home, the government evidently believes that any policy lowering property values will turn those voters against them.
As a result, for decades successive governments have enacted policies privileging home ownership and enabling prices to steadily rise beyond what our population can reasonably afford. Now we find ourselves in a full-blown crisis and once again, the government is trying to have their cake and eat it too by “improving affordability” without actually lowering prices - an impossibility if there ever was one.
We’ve backed ourselves into this corner. The program and implicit promise of securing ever-rising property values has shifted wealth from one generation to the previous and into the hands of banks. It can continue no longer. We must entertain real solutions that bring down the price of homes by limiting the profits available to lenders and investors. The most efficient solution is that which is tried and true, Land Value Taxes.
Mortgage amounts are limited by how much a family can afford each month. Those with more income coming in can afford higher payments and take out larger loans. Conversely, higher housing expenses (property taxes, insurance etc.) mean less income is available for monthly payments and thus smaller loans. By taxing land, the portion of a property that appreciates and fuels price growth, the government would limit the profitability of homeownership and with it, the rampant speculation and lending that captures those profits. This would immediately throw a wet blanket on the affordability fire; speculators would no longer find profits on the backs of working families and banks would have to drastically curtail lending - all meaning fewer dollars bidding up homes. In short, prices would fall.
But why would voters want to exchange large mortgages for a new tax on land? Because unlike banks, government will give that money back. Any revenue from a land value tax is simply returned to families through lower income taxes, rebates, or some combination thereof. Such a policy might be a hard sell, but the alternative is the corporate landlords, lifetime debts, and tent cities rising all around us.
As Einstein said, “The definition of insanity is doing the same thing over and over and expecting different results.” We’ve tried fuel on this fire, how about we try water?