Can Canada really build 3.9 million homes by 2031?

Jordan: We’ve known for years now that Canada faces a growing housing crisis. We’ve watched a generation of young people struggle to afford rent, more than half of them giving up on the idea of ever owning their own home. We’ve seen millions of Canadians priced out of the cities where they were born or where they work, moving further and further away only to drive up prices in the markets where they settle. And if all that is too theoretical, just go to your nearest park and count the tents. All of this is probably why it didn’t go over so well last year when our Prime Minister seemed to pass the buck.

CLIP: Justin Trudeau: I’ll be blunt as well, housing isn’t a primary federal responsibility. It’s not something that we have direct carriage of.

Jordan: You can’t blame a single quote of course, but I’ll point out that polls since that time have not been kind to the federal government. So this year they’ve decided to finally get serious on the housing crisis. How serious? Well, it’s the key expense in a massive budget unveiled this week, and they say they not only have a plan to hit the target of homes Canada will need in the next decade, but to blow right past it. How exactly do they plan to do that and will it work? I’m Jordan Heath-Rawlings. This is The Big Story. Mike Moffatt is the Senior Director of Policy and Innovation at the Smart Prosperity Institute, an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, and one of Canada’s leading experts on housing policy. Hey Mike.

Mike Moffatt: Hey, thanks for having me.

Jordan: You are most welcome. And we’re going to talk about the government’s housing plan in depth today. Before we do, I kind of want to see if you can quantify how far behind are we on this issue in terms of the number of homes we should have by now that we don’t have and the number of homes we’re not building?

Mike Moffatt: Yeah, absolutely. So we estimated at the Institute that we need to build about 3.5 million homes over the next decade. From 2021 to 2031, we’re likely to build about 2 million in that time. So we’re about a million and a half units behind. So we basically need to double housing construction over the next decade to catch up, to start to get affordability back to where it was, say about a decade ago.

Jordan: Is the lack of housing the top driver of unaffordability in the sector? Are there other things at play? What’s the balance there?

Mike Moffatt: Yeah, it largely is just a disconnect between supply and demand. You’ve got a lot of people chasing a limited number of homes. Now obviously there are other things that play in impact. So interest rates being a big one, homes that are getting left vacant is often indicated as something that’s an issue. I think that’s overplayed a little bit, but that can happen. Things like foreign speculation, any number of issues. But if I had to just pick one or say, okay, what is the primary driver of this? It is that disconnect between the number of homes and the number of people in Canada.

Jordan: So last week ahead of the budget, the Liberals released their housing plan before they costed it out in the budget. Yesterday you mentioned that we are tracking for 2 million. You think we need 3.5. What was your reaction when you saw 3.9 million homes by 2031 in there?

Mike Moffatt: Yeah, this is something that came out on Friday before the budgets. I think as a goal, it makes sense. It is, again, even more aggressive than what I think is necessary, but there’s nothing wrong with having a big hairy, audacious goal. I think the challenge is actually getting there.

Jordan: Right.

Mike Moffatt: The budget lays out that the federal government’s actions are going to help contribute to building an extra 1.2 million homes that they need to see 800,000 homes come from provincial and municipal action. Yeah, that’s great. I think that makes sense as a goal, but there’s no math here about how all of these initiatives add up to 1.2 million, so I’m going to need to see the math on that. But overall, I do think it is a strong suite of policies that will certainly help. I don’t know if it gets us to 1.2 million, but it does get us a lot further than we were before.

Jordan: Is this plan a change of strategy from what they’ve been doing previously? I mean, we’ve talked to you before on this show. We’ve talked to other housing experts and when we talk about what not just the federal government, but municipal and provincial governments across the country are doing, it’s always been kind of described as drops in a bucket maybe, or picking individual strategies to try and get some things built but without a cohesive plan. Does this feel that way to you?

Mike Moffatt: It does, yeah. And there was a big change that back in 2017, the federal government released their national housing strategy, which was really a focus on social housing, various forms of non-market affordable housing, but for the most part, they left the market aspects of this to the provinces and municipalities. And one of the things that we heard the prime minister say last summer in Hamilton, Ontario was that housing was not a primary federal responsibility, which is one of the things that is technically true as far as the constitution goes, but it is not something that people wanted to hear, and there was a lot of backlash from Canadians at that point. The government started dropping in the polls right around the same time. It’s hard to connect the dots, but I think there is a relationship there, and I think the federal government then got the message loud and clear that this is a national crisis and in the time of a national crisis, Canadians expect the federal government to act. So they’ve done so. I mean, they started with cutting the GST on apartment construction back last fall, and now have presented a comprehensive plan to attack the housing crisis and one that’s now having people say a little bit that they’re overstepping their bounds and they’re stepping into provincial jurisdiction.

Jordan: We can talk a little bit later too about what’s in this plan to make housing more affordable now until the rest of these millions of homes are built. But maybe first, can you walk us through some of the main things this plan does to make it easier to build the kind of housing that we need?

Mike Moffatt: We could look at the cost of housing in sort of three components. The first is taxes. The taxes make up about 31% of the cost of construction. So what they’ve done here is eliminated the GST on apartment construction. They’ve reintroduced some of the tax credits that we had in the 1970s in 1960s and seventies to build apartment buildings. The so-called accelerated capital cost allowance provisions. They’ve forced or requiring municipalities to freeze development charges for the next three years. Those are big inputs. So they’re attacking the tax side. On the land side, which is the next big cost is they’re making a lot of land available. Canada post offices, national defence lands for construction. And then the final piece is the construction piece where they’re putting in innovation policies. They’re increasing the number of skilled trades people and so on. So they’re really attacking this from three sides. They need to get taxes down, make more land available, and make it easier to build. And they’ve got policies that stretch all three of those.

Jordan: You and others have spoken a lot about, and this is not obviously a purely federal issue at all, but about how hard it’s become to build housing in this country. Obviously developer costs you mentioned are a cost of that, but also just in terms of zoning regulation and stuff like that, does this plan do anything to simply make it easier for the kind of housing that we need to be built to happen in the places that we need it? Or is that something that’s still going to be a jurisdictional fight?

Mike Moffatt: Well, it is still certainly a jurisdictional fight because ultimately those are municipal rules, but municipalities being so-called creatures of the province, they’re governed by provincial regulations. So what the federal government has done is set up a 6 billion fund for water and wastewater infrastructure. This is something that the Federation of Canadian Municipalities has asked for, but the federal government says, we’re not just going to give you this money in order to get this $6 billion, cities need to allow fourplexes as of right to get transit dollars. They need to do things like get rid of minimum parking regulations, near transit stops. They need to legalize the building of apartments, near transit stations and so on. So what the federal government is doing is using their federal spending power to essentially buy reforms at the municipal level to make it easier for developers, both for-profit and not-for-profit to be able to build in our cities.

Jordan: I was reading one of your threads about this plan on Twitter, and you mentioned a wonky little policy, I think called Eiffel that is going to make a huge difference. I was wondering if you could explain that to us in a bit more depth.

Mike Moffatt: Yeah, absolutely. So this is a really wonky policy. This is something that’s getting implemented across the planet. It’s something to help avoid tech companies from basically getting out of paying their taxes. So what essentially some companies do is in a higher tax country, let’s say like Canada, they have that Canadian affiliate of their company take out a loan from a low tax country, and basically what that does is shifts all of their profits from the high tax country to the low tax country as a way of basically getting out of paying taxes. Very necessary thing. The challenge is, and that’s called the Eiffel Rules. These Eiffel rules, were getting developers caught up on them. So if you are a developer that operates in both Vancouver and Seattle, you build apartment buildings on both sides of this. You’re taking out a bunch of loans and all of a sudden there are these limitations of how much interest you can deduct on your taxes when you’re building an apartment building. So developers have been kind of screaming about this going like, Hey, we’re not the bad guys here. We’re getting caught up in this net on interest rates that is raising our taxes, but we’re not doing anything wrong. We’re just happen to be operating on both sides of the border. The Americans put in an exemption basically saying, look, if you’re an apartment developer, these rules don’t apply to you. Yesterday, Canada put in a similar exemption. Again, incredibly wonky, but really necessary because we were starting to see a slowdown of apartment construction in places like Vancouver because of this tax rule that was really meant to go after the big tech giants not meant to go after apartment builders.

Jordan: Was there anything else in there on the building side that caught your eye like that, something that might seem small but could have an outsized impact on the problem that we’re dealing with?

Mike Moffatt: Yeah, I think some of the federal land issues are interesting. So for example, Canada Post has more locations in this country than there are Tim Hortons, which is surprising because we have a lot of Tim Hortons in this country.

Jordan: Yeah.

Mike Moffatt: And a lot of these are standalone buildings, sort of one story building. So the idea here is that developers, and again, both for-profit and not-for-profit could work with Canada Post. You could take that existing site and redevelop it, have first floor be retail, so you have your Canada Post location and maybe a pharmacy or something else there. And then floors two through six could be apartment buildings. So we could create a lot of great housing on these Canada Post sites, which are all across the country. Another one is National Defence sites. So my hometown of London, Ontario, there’s a Naval Reserve base, like right downtown, right on the forks of the Thames. They’re going to make it easier for developers to come in and build housing, which could be just for anyone, but it could be for reserve families or veterans in these great downtown locations owned by the Department of National Defence. I think that’s a great thing. I think that could get a lot of homes built on land that’s frankly underused right now.

Jordan: Before we move on to affordability stuff, as you look at the stuff that’s in here about making building easier, is there any low hanging fruit you were hoping or expecting might be in here? That’s not, is there anything missing? What else should be in here that’s not?

Mike Moffatt: Yeah, I would like to see them go further on deregulation, particularly when it comes to municipalities because that really is the big holdup here. So again, they’ve gone a little bit on the infrastructure side. On the transit side, I think it’s helpful. It doesn’t really necessarily go far enough, but I do understand the hesitation. You already have premiers, particularly in Alberta, who are screaming about these changes. So I can understand why they didn’t go further, but I think we need to, and I think I’m hopeful that next year we see the government go even further on again, providing more infrastructure funding, more transit funding in exchange for municipal reforms.

Jordan: How much does the politics of the provincial federal relationships, particularly obviously in places right now with Conservative premiers play into this? What’s the reaction to this plan been from Danielle Smith, Doug Ford, et cetera?

Mike Moffatt: Yeah, so it is been mixed across the province. So in British Columbia, it’s largely been favourable, and in part the federal government is actually taking a lot of their cues from BC.

Jordan: Right. You mentioned that BC is leading the country right now in terms of building, right?

Mike Moffatt: Yeah, absolutely. In per capita terms, no question. And one of the things in the budget is a new Canada Builds program, which is basically just taking the BC Builds program and encouraging provinces to adopt that model. So they’re basically signaling like, Hey, British Columbia has this best-in-class system, let’s move that across the country. So there’s a kind of warm relationship there. There’s a lot of tensions between Trudeau and Smith and Alberta. In Ontario, it’s a little bit more mixed, where initially when the housing plan came out, the Ford governments was kind of vocal against it, but now they’re being a little bit more conciliatory and saying, okay, well let’s work together on this. And one of the questions I get asked a lot is, why didn’t the federal government do more three or five or seven years ago? And I think the answer is that they were really hesitant to start picking fights with provinces and municipalities. I think that was a big mistake, and now they’re having to catch up for lost time. I do think there are going to be battles. There are going to be tensions, but I think finally the federal government is taking the right approach to saying, no, we need to tackle this head on, rather than playing kind of constitutional lawyer and going, no, this is provincial responsibility, so we’re going to be hands off here.

Jordan: In the meantime, while we wait for those millions of homes to be built, we’re still facing an affordability crisis, still facing a housing crisis. What has the government done in this budget to make homes more affordable or attainable for Canadians who need them right now?

Mike Moffatt: So there’s a couple of things. So on the ownership side, there’s changes to amortization rules for first-time home buyers. So now if you are a first time home buyer, you can get a 30-year amortization on an insured mortgage for a newly constructed home. And this is in part because we’re seeing, despite the housing crisis, we’re actually seeing housing starts fall in most of the country simply because young people can’t qualify for a mortgage right now. So they’re putting this in place to help them. But the big thing that they’re doing on the rental side isn’t so much a housing policy. It’s actually an immigration policy. They’ve announced over the next three years, they’re reducing the people who are non-permanent residents. So these are people like international students, asylum seekers, those on some kind of temporary visa. They’re actually going to lower the number of people in that category by 600,000 over three years, and this is really going to make a difference. I think in our college and university cities, they’re really ramping down international students, and we’ve seen in places like London and Kingston and Waterloo, places with big student population, rents have skyrocketed over the last five to six years, and the government’s saying, look, we need to get those numbers down just because vacancy rates are close to zero, rents are going up 10% or more year over year. This can’t continue, and the only way to get some balance in the short run is just frankly to have fewer renters.

Jordan: I probably should have asked about this in the building category, but is there anything in here, because you and I have talked before about the almost total lack of new purpose built rentals, is there anything in the building section to ensure that the actual kind of housing we need is built and not more large single family subdivision homes?

Mike Moffatt: Yeah, well, actually we’ve seen a big shift over the last 10 years to building more apartments and particularly more studio suites, whether they be on the rental side or the ownership side. I expect that to continue. I think one of the things that we’re missing is being able to build two and three bedroom apartments. There’s not a lot in here that’s going to get that. One of the piece in here though, that I think is potentially interesting, making sure that we get families into these homes, is they’re talking about banning hedge funds and other large corporate investors from buying up single family homes. I don’t know how much of an issue this is right now in Canada. I don’t really think it’s happening at any kind of scale, but I do know it’s something that people are worried about and the federal government saying, look, we want to make sure that the homes that are built actually get into the hands of families and not some overseas hedge fund.

Jordan: Does anything in here tackle the real problem that a lot of people have talked about of homes as an investments, and I’m not necessarily meaning here, hedge funds and huge corporations, but the way people approach homes as a place to store and grow their money as opposed to just a place to live.

Mike Moffatt: So there are some stuff now, again, it’s mostly aimed at large institutional investors rather than say, mom and pop investors. Now, one piece that actually might deter mom and pop investors from buying third and fourth and fifth properties is this week’s change or the budget’s change to capital gains taxation because we know that secondary properties are subject to capital gains tax, and now for any capital gains above $250,000 a year, two thirds of that capital gains is now going to be subject to income tax rather than the 50%. Now, that actually might deter some, again, mom and pop investors from buying up entire neighborhoods just because now it’s not nearly as tax efficient. There are probably better ways to make money and not have to return so much of it to the tax man.

Jordan: I want to get your impression of how we should be thinking about this government’s course on housing from here forward. It’s a really interesting plan. There’s a ton in it. What happens next and what will you be watching for to make sure that all this policy is actually having an impact?

Mike Moffatt: Well, absolutely. So I think now they have to be in implementation mode. I think Canadians are rightfully skeptical of not just this government, but any government’s ability to deliver. So that’s what I’ll be watching. How long these tax changes, how long will it take for them to be in the tax act? There’s a provision in the budget about taxing vacant land. Sometimes you’ll see speculators buying up residential land and just sitting on it, not building, hoping it will go up. They’re talking about putting a tax on that to deter that kind of behavior. It’s a really interesting idea, but they talk about doing consultations on it because it’s going to be complex to put into place. Well, how long are those consultations going to take? What is the process there? So now we’re going to have to look at these details. We do need to understand that yes, consultations need to take place. Yes, we need to make sure that we’re not designing policies with all kinds of bad unintended consequences, but I think we really need to be watching on timelines on this because the crisis just keeps growing and growing, and we don’t have 5, 10, 15 years to wait.

Jordan: What is a reasonable timeline to expect to see an increase in the number of homes built per capita that you were talking about, that stat?

Mike Moffatt: Yeah. Well, I am hopeful from this that we start to see that in 2025, so the CMHC has put out housing start projections for the year, which are a little bit lower than what we have now. I’m hopeful that near the end of the year we start to see those projections rise up and we start to have more housing starts built in 2025 than what we’re projecting today. If that happens, if we exceed, I think the target or the projection right now is about 220,000 homes. If we start to see that go up to 250, 260, 270, I think we can then conclude like, okay, yeah, this is really starting to make a difference.

Jordan: Mike, thank you as always for this. It’s fascinating and I understand this policy a little better now.

Mike Moffatt: Well, thank you for having me,

Jordan: Mike Moffatt of the Smart Prosperity Institute. That was The Big Story for more including coverage from yesterday of the federal budget. You can add to The Big Story podcast.ca. You can also search for Mike Moffatt there, and you’ll find his previous analysis of the housing crisis. You can leave us feedback on this episode or any other by emailing hello at The Big Story podcast.ca or by calling 416-935-5935 and leaving a voicemail. The Big Story is available on absolutely every podcast player and remember, subscribe or follow. Now we have episode one of Pay Dirt, the Inside Story of the Green Belt Scandal. Coming to you next Monday. I’m Jordan Heath-Rawlings. Thanks for listening. We’ll talk tomorrow.