Even 'sacred cows' should be on the table to fix housing affordability: RBC

A Royal Bank of Canada (RBC) sign is seen in downtown Toronto March 3, 2011.  Royal Bank of Canada (RY.TO: Quote) said on Thursday that quarterly earnings rose 23 percent, driven by retail loan growth and lower provisions for bad loans  REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)
Royal Bank of Canada (RBC) senior economist says the government should do something to cool housing markets (Reuters)

Canada’s red-hot housing market has made homeownership even more unaffordable during the COVID-19 pandemic and Canada’s biggest bank says the federal government and regulators should examine all options to address the issue.

“Many Canadians believe the policy environment guarantees property values will rise indefinitely,” said RBC senior economist Robert Hogue in a new report. “Policymakers should put everything on the table, including sacred cows like the principal residence exemption from capital gains tax.”

Homeowners are currently required to pay capital gains tax only on investment properties, and not when they sell the home they live in. Hogue acknowledges the idea is controversial and there could be unintended consequences.

Hogue says there are a number of reasons policymakers should pour cold water on overheating housing markets. These include growing wealth inequality, capital being choked off from more productive parts of the economy, and the threat of destabilization resulting from a major correction.

He also says Ottawa should take the reins, because central bankers aren’t likely to act. The federal government will table its first budget in two years on April 19. The next Bank of Canada interest rate announcement and monetary policy report is April 21.

A newly-introduced mortgage stress test helped slow down markets in 2018, albeit temporarily. Hogue says more rule tightening could help this time too, possibly including a stricter stress test, a higher minimum down payment, and a lower cap on refinancing.

New Zealand recently announced a phasing-out of mortgage interest expense tax-deductibility for investors to help put a lid on prices. Hogue says it’s an interesting idea and Canada should also look at ways to curb speculation. Although Hogue has ideas, he admits he doesn’t have all the answers.

“One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time,” he said.

Increasing available housing supply

Hogue says increasing transfer taxes such as the land-transfer tax should be avoided because it would limit mobility for those moving for work. Previous federal budgets, and last year’s fiscal update, including plans to boost incentives for first-time buyers. Hogue says without boosting supply, the idea should be shelved because it would just add fuel to the fire.

A lack of inventory, along with low rates and a desire for space, have helped stoke the rally. Hogue says there are a number of things local governments with the help of the federal government can do to address supply shortages.

“These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called ‘missing middle’); growing Canada’s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments—or better yet, tipping the scale in their favour.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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