On June 10th 2024, the CNCLT held a “Lunch and Learn” presentation with Dr. Alan Walks to answer CNCLT members’ questions about how governments subsidize home ownership.
“Subsidized housing,” a term that is often stigmatized, conjures affordable and supportive rental housing. Dr. Walks convincingly showed that the term should be equally applied to home ownership. While there are numerous tensions in federal housing policy in particular, between policies to stimulate demand for housing and keep prices high and policies to encourage affordability and non-market rental housing, we have focused here on the policies that subsidize home ownership.
We encourage you to watch the whole presentation, which is eye-opening, but you’ll find a summary, with quotes from Dr. Walks, on the next pages.
7 Key Takeaways
All levels of government, municipal, provincial and federal, have measures to stimulate the private purchase of homes. In addition to the tax system, there are direct payouts, grants and forgivable loans. An overlooked but important measure are the effective subsidies to the the private lending system to support the issuance of mortgages.
First time home buyers receive a nonrefundable federal tax credit up to $1500. There is a GST and HST rebate on eligible purchases by eligible buyers. In addition, the federal homebuyer’s plan allows people to withdraw money from their RSP. This was previously up to $35,000, soon to be increased to $60,000, without any tax penalties, though it must be repaid within 15 years.
The First home savings account (FHSA), which was created by the Liberals in 2022, allows first time buyers to put to $8000 into this account, reducing their taxes by the same amount. There’s no tax payable when it is removed. It’s thus a tax giveaway to first time buyers on savings and purchases.
“In my opinion, the [FHSA] is a very inequitable measure. Because it allows the children of wealthy parents, who earn decent money and wealthy parents who also earn decent money, to get major tax exemptions. Whereas it doesn’t really help anybody else.”
Mortgage interest tax exemptions for investment properties is meant to entice investment in second properties for rental. It has been coupled recently with measures that penalize vacant homes. In practice, however, it is a major tax giveaway to those who own second properties, including cottages, but particularly those with condo units to rent out.
It promotes speculation and risky behaviour, encouraging the purchase of a second property; the investment is as much for the capital gain as for the rent from the second property.
The capital gains inclusion rate used to be 50%.The Liberal government in the 2024 budget increased it to 66% for anything above $250,000. This means that if you have a second property and it increases in value, the increase above $250, 000 is included in the calculation for tax payable at 66%.
Anything less than a 100% means that there’s a tax free element that promotes speculation on property.
In addition, until 2022 there was no tax at all on assignment sales. The purchase of a pre-construction condo on spec can be enormously lucrative, given how market value can go up dramatically.
“Sometimes people were buying these [condos] with only like $20,000 down, $40,000 down, and then making, crazy amounts of money, half a million, etcetera. And there was no tax. This encouraged flipping, as you might guess. So thankfully, those are now taxed, at the capital gain.”
Homeowners pay a lower share of the cost of the services they use than other land uses in municipalities, often lower than renters.
Many municipalities have property tax exemptions or generous phase-ins of property tax increases, often for seniors, those who have lived in a municipality for a certain amount of time or those who have disabilities. The provisions mean that more of the tax burden is placed on younger households or more recent households who are typically more indebted because housing prices have increased.
These programs don’t necessarily have income criteria: whether you own a $5,000,000 home or you own a $300,000 condo, a property tax phase in or exemption might apply. This is the case in Vancouver. It’s been said that one of the reasons why wealthy people retire in Vancouver is they can often phase in a property tax increase over many years and pay much less. This means that everybody else is paying a higher tax rate than those wealthy seniors.
The federal government guarantees insures mortgages to home buyers, whether they are first time homebuyers or owners of multiple properties.
The banks don’t hold the risk. Rather, the federal government holds the risk.
This means that the banks are willing to lend more and lend to those who otherwise would be too risky to otherwise lend to, such as speculators owning multiple properties. This pushes up real estate prices as more people bid for the same housing, especially in a rising market.
The main program for this is the Canada Mortgage Bonds Program, bonds created by the federal government. This is how it works: the bank issues a mortgage to the the borrower. Instead of the borrower paying back the the the bank, the borrower pays their mortgage payments to whoever bought the mortgage-backed security.
The mortgage itself, the the piece of paper, is packaged into mortgage-backed security, and then that mortgage-backed security is sold. In the US and elsewhere, these are mostly sold directly to investors.
Condo developers have been big benefactor from various government subsidies. Here are four ways:
1) The CMHC is the lender of last resort, when a rental community gets into crisis, in a coop, for example. During the global financial crisis of 2008, when a number of unfinished condo developments ran in trouble with financing, the CMHC stepped in and became a lender of last resort, allowing those condos to be finished. It has continued to do so. While condo developers took a risk knowing that there could be potential crisis, they were bailed out, making the CMHC a cheap insurance policy for them.
2) When the federal governments help first time buyers purchase a home, this often means a condo unit.
3) The federal government, with mortgage bonds and its insured mortgage purchase program, stimulate the banks to lend to people who might otherwise not get a mortgage at lower rates. This includes speculators buying condo units to sell later.
The federal and provincial governments exempt mortgage interest for second properties, again, allowing those speculators buying condo units and spurring them to buy them so that they can rent them. This benefits condo developers.
4) Governments at all levels have sold off land to private developers, often at rates lower than market value. This is particularly the case when the land is rezoned for high density residential after the sale. The cost would be higher if it were already zoned for high density residential: the developers effectively get a discount.
In the fall of 2023, the federal government decided to borrow on international markets, via the sale of treasury bonds, which are the typical bonds that they use when they have a deficit. They can spend the money they receive from selling those treasury bonds on anything, including the health care system. But they decided that they would take the money that they got from selling those Treasury bonds and buy their own Canada Mortgage Bonds.
The Canada Housing Trust is created by the federal government. It’s part and parcel of the larger treasury. And if there’s a gap, the federal government has to make up that gap by diverting monies from other programs. If there is a recession and people stop paying their mortgage payments, the federal government will have to make up the difference by cutting health care and other programmes or borrow more money at high interest rates on international markets.
“It’s a really strange policy. It means that they’re taking money that is borrowed from international investors and pension funds that could be spent on anything, including covering health care and converting it into money that has to be spent buying mortgages from the banks.”