To reduce housing costs in Toronto, cut red tape around new construction
Last week, the provincial government in British Columbia announced it would impose an additional 15 per cent tax on foreign homebuyers in Greater Vancouver. The goal is to slow the runaway growth of housing prices.
Predictably, this move has garnered attention in Toronto, where housing prices have also skyrocketed. Within a day of the announcement, Ontario’s Finance Minister Charles Sousa stated he “will be looking very closely” at B.C.’s approach, raising the spectre of a similar tax in Ontario’s largest city.
But if policymakers want to address the price of housing in Toronto, there are more important factors they should focus on. Specifically, they should take a hard look at why the supply of new homes is not keeping up with growth in demand.
This is an important cause of price increases, and it’s due in large part to regulatory red tape that holds back the construction of new housing. Instead of trying to micromanage the housing market by taxing certain categories of buyers, governments in Queen’s Park and city halls across the GTA should focus on reducing these barriers to new homebuilding.
Recent work by the Fraser Institute takes a closer look at the gap between demand and supply in cities across Canada, including the GTA. It finds that long and uncertain approval timelines for building permits, as well as costly fees and local opposition to new homes, slow the growth of housing stock. The result is fewer new homes with a growing pool of buyers, leading to rising prices.
Removing some of these barriers would make it easier and more financially attractive to construct new homes, which would, over time, put downward pressure on housing prices. Taxing foreign homebuyers won’t do anything about the red tape interfering with the construction of new homes. What’s more, it could lead to a host of unintended consequences.
For example, if taxing foreign buyers affects demand for homes in some cities, where might that demand migrate to? The geographical limits of these taxes may simply nudge buyers towards cities further down the 401 or 400 highways—or to Canada’s other major urban centres, presenting a new set of challenges.
Policymakers are right to be concerned about housing affordability, but a jarring shift in policy could change market expectations, leading to unpredictable consequences. In the event that the tax significantly shifts demand, longtime owners could lose out on equity they planned to use for retirement and families who recently entered the market may face difficult circumstances if their home values suddenly drop.
Instead of attempting to control the demand for housing by taxing certain buyers, provinces and municipalities should use the tools they already have to ensure that regulations allow for timely construction of new housing to meet pent-up demand.
High housing prices in Canada’s urban centres is partly a problem of government’s own making, as regulatory barriers are inhibiting the construction of new homes. Real solutions to this problem will likely involve removing some of these barriers, not further heavy intervention in the housing market through targeted taxes.
The unfortunate reality is that this sort of economic intervention and micromanagement often has consequences that are worse than the problem governments are trying to fix.
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