Rising Interest Rates & New Housing Budget Solutions A Cause For Concern?
The consensus among the big six banks that the Bank of Canada will make Canada's second ever doubling of interest rates has come true today.
“There’s enough there to give the Bank a pass at hiking 50 basis points, especially following the February flash GDP number,” Andrew Kelvin, chief Canada strategist at TD Securities, said by email. “In this environment, we think it probably makes sense for them to take the path of least resistance.”
"The unemployment rate fell to 5.5%, from 6.5% in January. That’s the first time the jobless rate has fallen below its pre-Covid level, and it’s now near a five-decade low. "
BMO, CIBC, RBC, Scotiabank, National Bank, and TD all forecasted that the Bank of Canada to take the interest rate to 1 per cent from the current level of 0.5 per cent. "The consensus among Canadian banks, which emerged Monday after a quarterly survey of executives showed firms hitting capacity constraints amid deepening inflation worries"
Aspiring homeowners to people looking to upsize, downsize, and refinance are all facing higher qualifying rates. The picture is clear, higher interest rates will continue to reward banks which may offset the new bank tax proposed by the Federal Liberal Party as part of the budget for 2022. Each maneuver reinforces that a specific subset of people will own a greater share of real estate by increasing the barriers to entry and consequently creating further generations of renters.
The budget proposed by Justin Trudeau's government seeks to tackle speculation, affordability, and access when it comes to housing. Major initiatives include:
The First Home Saving Account (FHSA)
Aspiring homeowners will have the ability to contribute up to $40,000 to a new tax-free savings account beginning in 2023. The concept marries features of the tax-deductible contributions of the RRSP and the absence of a tax when withdrawing funds from the TFSA. FHSA contributions are capped at $8,000 each year and, unlike the RRSP, money does not have to be repaid to the FHSA
Whilst the FHSA improves on aspects of the RRSP and TFSA, the FHSA falls short because the $8,000 per year cap means that aspiring homeowners will not be able to take advantage of the $40,000. Canadians are well aware of the pace at which values have increased over the past thirty years let alone during the coronavirus pandemic in the past two years and this drawback will significantly delay any meaningful impact that it will have on housing affordability.
It would have been beneficial for those looking to take their first step on the property ladder if the FHSA did not have an annual cap.
Foreign Buyer Ban
Simply put, it is a two-year ban on foreign buyers across the country. To quote the Liberal Part's budget release, "...Budget 2022 announces the government’s intention to propose restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years." The government only intends to propose such an initiative, hence, it may never see the light of day.
If passed, there are many ways for individuals to work around the policy. It exempts International students on the path to permanent residency and individuals on work permits who are residing in Canada. Non-residents are still permitted to purchase primary residences, just not investment properties. Evidence from BC and Ontario is that taxes on non-resident buyers have not made housing any more affordable. For instance, in BC, foreign buyers accounted for just over 1 per cent of total transactions. An outright ban, as its currently designed, would have little to no impact on the housing market.
No Property Flipping
Selling ledes is the name of the game. Beginning next year, any home acquired and disposed of within a twelve-month period will be taxed as business income and will not qualify for primary residence exemption. Specific exemptions can be made to those who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce.
The Canada Revenue Agency (CRA) already tracks homes bought and resold in a short period of time. People with a track record of doing flips are typically flagged by CRA and are fully taxed. This policy does not introduce anything new.
Housing Accelerator Funds
The government intends to provide $4 billion over the course of five years. The budget encompasses an annual incentive for municipalities per door or funding forto bolster investments in municipal housing planning and delivery processes that are intended to expedite housing development. Despite the positive intent of this policy, how can the government efficientyly allocated $4 billion? There is currently a shortage of skilled labour for which they are importing bringing in skilled workers in greater number. Add to that supply constraints and more bodies in government to maintain that may be required to speed up projects, there is a possibility that the funding will not be utilized to bring additional units to market.
The funding will be administered by the Canada Mortgage and Housing Corporation (CMHC) and seeks to encourage municipalities to “grow housing supply faster than their historical average; increase densification; speed-up approval times; tackle NIMBYism and establish inclusionary zoning bylaws; and encouragepublictransit-oriented development.” The federal government is aiming to bring forth an additional 100,000 new housing units over the five-year period. Mike Moffatt, Senior Directory of Policy at the Smart Prosperity Institute, a think-tank in Ottawa, estimates that "about 70,000 units of all types are added, from detached houses to condominiums to purpose-built rentals to subsidized units" on an annualized basis in order to "accommodate the expected 2.27 million more people who will live in Ontario by 2031." The estimates made by the federal government forecast that 3.5 million new homes will be needed by 2031 to close the gap between our population growth, fueled in large part by planned-for record levels of immigration.
Further to that point, Stephen Brown, a senior economist at Capital Economics, noted that the $4 billion in funding works out to $40,000 per home. The funding, argues Mr. Brown, "will not even offset the 30 per cent rise in the cost of residential construction projects since the pandemic."
A Home Buyer’s Bill of Rights
This proposal encompasses a ban on blind bidding and a legal right to conduct a home inspection.
In order to carry out the former initiative, the federal government may have to be made part of the criminal code in order to outlaw this form of sales. It is imperative for the homeowner to select how they go about selling their property whether it is done through blind bids, open auctions, or even privately. Moreover, the emotions that are a part of auctions will not prevent people from pushing up prices.
Homeowners may want to obtain home inspections prior to listing their homes for sale. The latter initiative would create greater transparency in the selling process. If implemented and sellers neither provide one upfront nor permit buyers to conduct a home inspection, it may evidently jeopardize their sale and limit the pool of buyers looking at their listing.
In short, much of these budget solutions for the nation's housing market are political theatre. Overall, the response from all three levels of goverment to the housing crisis faced by many across Canada has not been expedient. The swelling of demand over the past couple of decades that been driven by immigration policy, low interest rates, a shortage of skilled labour, red tape over new development, and overzealous fiscal policy.
Interest rates currently stand at nearly half of what they were prior to the economic easing that took place throughout the coronavirus pandemic. Knowing this and the fact that homebuyers have been stress-tested at rates no less than 5 per cent, it should be known that it is not a time to panic.
For now, the federal government has steered clear of adopting policy that would increase the minimum downpayment for investment properties along with an increase in the maximum amortization on insured mortgages. This, however, does not preclude them from ever being implemented.
What may we see down the road? Firstly, entry-level products will remain in high demand. Secondly, people may head back to the market after allowing the new announcements to settle in order to take advantage of their rate holds rather than getting approved all over again at a higher rate.
At the end of the day, our national housing market sits at just 1.6 months of inventory and the proposed plan remains a far cry from generating a more balanced market.
