Want real action on housing? Tax the land (The Star Opinion)
Canada needs more housing in the places where people need to work and want to live. Implementing a land value tax will incentivize such development.
Originally published June 22, 2024 by The Toronto Star | 3 min read
The only solution to the housing crisis is to build more housing in the places where people need to work and want to live. A land value tax will incentivize such development write Daryl Fairweather and Floyd Marinescu.
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By Daryl Fairweather and Floyd Marinescu Contributors
Canada faces a housing crisis, with median home prices in Canadian metropolitan areas reaching $788,000 and soaring to $1.17 million in Toronto. This has made the dream of owning a home unattainable for most, while many renters struggle to afford their housing payments. With a shortfall of 3.5 million housing units needed to restore affordability, the need for a solution has never been more urgent. Single family homes that sprawl into the suburbs and exurbs are not an affordable or sustainable solution because commuting to the city via car comes with significant financial and environmental costs. Canada needs more housing in the places where people need to work and want to live, and implementing a land value tax will incentivize such development.
[Map from the print edition of this article in The Toronto Star, Sat June 22, 2024. Scroll to the bottom for the full print article.]
The only solution: Build more housing
Increasing the supply of homes is the only way to sustainably lower housing costs for homebuyers and renters. Programs that assist homebuyers or renters subsidize demand, which drives home values higher by increasing the prices buyers and renters are willing to pay. For example, Canada recently announced that first-time home buyers who can’t afford the usual 20 per cent down payment will be able to get 30-year mortgages. This change boosts their buying power by more than $50,000. However, because the loan is stretched over an extra five years, homeowners will end up paying much more in interest in the long run. Cash strapped buyers who are competing against the wealthy for homes will take on this debt because they don’t have viable alternatives.
To solve the housing crisis, we must build more housing units where they are needed most. It doesn’t make sense for a plot of land near transit, job opportunities or education opportunities to be occupied by a single family when it could be occupied by multiple families via the addition of more units. However, current incentives discourage residential landowners from densifying housing on their land. Property taxes are based on the market value of the land and any structures on it, making an empty or underdeveloped plot of land less expensive to hold than a duplex, condo or apartment building. This tax structure creates a distortion in incentives that makes it profitable for landowners to leave land underdeveloped.
Fix the incentives with a land value tax
Nearly all politicians and housing advocates point to the need for broad regulatory and zoning reforms, such as stronger protections for renters and the elimination of single-family zoning. While necessary, if such plans are not paired with a land value tax, they will not address the incentives which make holding homes on underutilized land more profitable than developing it.
In metropolis’ like Toronto, the population density is going down in old neighbourhoods adjacent to the downtown core, despite the land being in the best proximity to jobs and amenities. Much of this land is already zoned for more density.
A modest land value tax would make it less profitable for investors to outbid families to buy and hold existing homes or to withhold valuable land from the market while waiting for values to increase. This type of land value tax would also provide landowners or homeowners with a financial incentive to construct more housing units on their high-value, underutilized land or sell their property to someone who will.
It might seem callous to suggest that homeowners on underutilized land be financially encouraged to move, but the reality is that one of the main culprits for the housing crisis is a misallocation of land. We need to fix that misallocation to ensure that every Canadian has better and more affordable housing options in their communities.
Supporting low-income homeowners
Generations of Canadians have enjoyed their home as the best, safest, and most tax-privileged investment they can make, but the home ownership rate levelled off at around 68 per cent two decades ago. For the last 20 years, the remaining third of Canadians have been locked out of home ownership by exorbitantly high prices. Among existing homeowners, low-income families tend to own much more land value relative to their incomes. Under this reality, the necessary step to revise this incentive — taxing land — would hurt low-income property owners the most. For the majority of British Columbia homes, for example, the value of the land the house sits upon accounts for more than 60 per cent or more of the home’s value.
Therefore, such a reform should return its revenues to families who have been harmed not just by the tax change, but to all the low-income households that have suffered under years of exorbitantly high housing costs. According to Common Wealth Canada, conservative estimates show that land value revenues from residential land rebated to households would leave the bottom 60 per cent of families better off.
Empower municipalities to lead the way
Canada’s housing market crisis demands bold and innovative solutions. By taxing land rather than buildings, we can incentivize much-needed housing development and ensure a fairer distribution of the land’s value. Provinces should empower municipalities to modify tax codes and experiment with a land value tax. Combined with policies to support low-income households, this approach facilitates a comprehensive solution to restore housing affordability.
It’s time to act decisively and create a sustainable, inclusive housing future for all.
Daryl Fairweather is the chief economist of Redfin and author of “Hate The Game: Economic Cheat Codes for Life, Love, and Work,” out April 2025 from The University of Chicago Press.
Floyd Marinescu is CEO of C4Media Inc. a software developer education company and founder and funder of Commonwealth.ca, a think tank that researches land value tax and public wealth.