I’m a cynic.  I’m a realist.  And I understand economics.

But those three things together and do you know what you get?

The following rant…

There’s no such thing as “free” when it comes to the services we, in Canada, receive.  The simple reason?  The concept of a zero-sum game.

In theory, every dollar expended by the government must come from a dollar earned through revenue, ie. taxation.  Actually, when you consider the cost of government, and potentially mismanagement, shrinkage, and waste, perhaps only $0.95 of every dollar raised through taxation is sent out back out into the economy in the form of government spending and public service.

Regardless, if the government is going to provide something new for “free,” that means it has two options on how to go about doing so:

1) Increase revenue
2) Decrease expenditures

This is the “zero-sum game” that I speak of.

There is, however, a third option:

3) Run a budget deficit

But if we’re going to assume that a deficit can’t be run forever and to an infinite amount, then we have to realize that any new spending must be offset either by new taxes or a decrease in spending.

So here’s where my cynical side comes out: in the last election, all the parties vying for the PMO’s office lined up to talk about “new spending.”  The NDP, for example, promised over $200 Billion in new spending.

How in the world did the government expect to pay for that?

According to the NDP themselves, they were set to raise $166 Billion in revenue through “new taxes and other measures targeted at wealthy individuals and large, profitable corporations.”

I’m skeptical, to say the least.  Aside from the $32 Billion deficit, I don’t believe a government has ever made an accurate forecast before, so I don’t trust their figures.  But I also don’t expect the wealthy and corporations to simply hand over $166 Billion without utilizing creative accounting and taxation.

What is my point?

Nothing is free.

A dollar out requires a dollar in.

A myriad of elections and political squabbles has forced all political parties to promise free this, free that, and on, and on, forever.

Nothing is free.

If you’re not cutting public services, then you’re raising taxes.  It’s not unreasonable to assume that your new “free” service is actually being paid for by, well, you.

I noted in a CTV Your Morning interview last month that about 35% of the cost of a new condo is taxation.

Take a $750,000 condo in Toronto.  The development charges are $164,500, on average.  There’s 13% HST buried in the purchase price.  Then once the buyer closes, they pay land transfer tax to the provincial and municipal governments.

I argued on live television that if the government really wanted to “make housing more affordable,” the easiest solution would be less taxation.

But then what?

Houses and condos are more affordable, but…….there’s no public garbage pickup anymore.

What’s that?  You want houses and condos to be more affordable but you also want public garbage pickup?

Alright then.

Houses and condos are more affordable.  But we close public schools.

What’s that?  You want houses and condos to be more affordable but you also want public schools?

So what do we cut then?

Pick your poison, folks.  You can’t have it both ways.

“Free” doesn’t exist.  Free means “paid for” but through tax revenue.  It can be paid for by printing money, but that leads to inflation, which drives up the cost of everything.

My cynical and somewhat egotistical side believes that the average person doesn’t understand any of this.  The average person says, “I don’t really like the leader of Party XYZ, but if they’re really going to provide free daycare, then they’ve got my vote!”

It’s not free.  Never has been, never will be.  Can’t be.

If daycare is paid for, then that money is coming from someplace else.  Services are cut elsewhere.  Programs are cut elsewhere.  Or, in theory, taxes are raised, but you can only raise taxes so much before people really start finding a way around them.  I believe I heard Conrad Black say that once.

So when it comes to all of the election promises and pledges that we heard from the various parties, it should come as no surprise that many of the measures intended to “increase affordability” will actually have the exact opposite effect.  You read that correctly: institute a new policy, intended at “helping would-be homeowners,” and the result will be higher real estate prices.  Oh – and new taxes.  Yeah, we can’t forget new taxes.  But as far as today’s blog post is concerned, let’s discuss the notion of “increasing affordability” which ultimately leads to increasing prices.

Imagine that?

Unintended consequences?  From government action?  The hell, you say!

It’s almost as though every government policy I’ve seen in the past decade has backfired!

So with that in mind, let’s look at some of the pledges, promises, and sound bytes on the housing market from the Liberal government over the past two months and analyze what type of effect this would have on the market.

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1) Increasing the CMHC mortgage insurance ceiling from $1,000,000 to $1,250,000.

This is incredible.

The government is going to “help” with affordability but basically doing something that will increase the value of houses in one market segment by 10-25% overnight.

Bravo!

I remember in January of 2017 when the market picked up where it left off during a really hot fall of 2016, when inventory was low.  By the New Year, buyers were basically saying, “I’m no longer buying a house; I’m buying a 5-year payment plan.  So what’s the difference between $825,000 and $875,000?”

There was no difference.

And from January 1st through mid-April, $800,000 houses literally went up in value by $200K.  Buyers with $999,999 could still buy with 7.5% down, whereas a purchase price of $1,000,000 would require a 20% down payment.  So buyers saw where the market was headed and they raced to get there before it passed them by.

If the CMHC were to start insuring mortgages of $1,250,000, all that would happen is a $1,000,000 house would go up to $1,100,000 overnight.

And then some!

It’s simple supply and demand.

Those $800,000, $850,000, and $900,000 houses started to move upwards of $999,999 because buyers were banging their heads against a ceiling, because supply massively lagged demand, and because buyers could afford to spend more, so they simply did – regardless of on-paper value.

If buyers who are capped at $999,999 are all of a sudden, tomorrow, allowed to purchase for $1,249,999, what do you think they’ll do with this new purchasing power?  Can we trust these buyers, who are literally in the most difficult segment of the market (specifically freehold in the central core at $999,999), to keep a level head and still value a $1,010,000 property at $1,010,000?  Or are they going to say, “fuck it” and simply throw an extra $100,000 at the house because that’s only an extra $375 per month?

Increasing the CMHC mortgage insurance ceiling from $1,000,000 to $1,250,000 will definitely “help buyers get into the market,” if that’s the government’s intent.  But it will help them for only so long, until a new ceiling is reached, and then we’re back where we started – only with higher prices.

Can the government not see this?

Or do they just not care?

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2) A new “Tax-Free First Time Home Savings Account”

This is a promise on the Liberal’s election website:

A New Tax-free First Home Savings Account

Young Canadians want the chance to own their home—just like their parents and grandparents did. But higher rent and the increased cost of living are making it harder and harder to afford a down payment.

A re-elected Liberal government will:

Introduce a tax-free First Home Savings Account will allow Canadians under 40 to save up to $40,000 towards their first home, and to withdraw it tax-free to put towards their first home purchase, with no requirement to repay it.

Remember what I said above, about what “free” means?

What’s the tax revenue on that $40,000, for every person who opens an account like this?  Let’s say, for argument’s sake, that the federal government loses $300 Million in tax revenue from not taxing $40,000 of a person’s income that is deposited into one of these accounts.  All that means is that the government is going to cut $300 Million in spending someplace else, or, add $300 Million to the deficit, or, increase taxes elsewhere.  It’s a zero-sum game.

Maybe the next time you go to buy a pair of shoes there’s a $5.00 “rubber tax” for recycling old shoes, and thus the person who saves $40,000, tax-free, buys six pairs of shoes in the four years it takes for them to save that money, and there’s $30.00 in additional revenue.  Maybe there’s an additional $0.10 on every bottle of alcohol at the LCBO, and that individual, over four years, buys 95 bottles of booze, and that’s an additional $9.50.

Add it up, over the course of this person’s four years (or lifetime if we’re running a budget deficit), and that person will repay that tax revenue.

Oh, and this FHSA will also enable more buyers to get into the market, so that’s more demand, and with the same supply, prices go up.

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3) Increasing first-time home buyer tax credits from $5,000 to $10,000.

Do I sound like a broken record?

Adding more purchasing power to the average buyer’s arsenal simply pushes prices higher.

This literally adds $5,000 to the average cost of a house in Toronto overnight.

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4) Reduce CMHC insurance premiums by 25%, saving an average of $6,000.

See above.

“Helping people buy real estate,” in all of these cases, is simply going to drive up the cost of real estate.

And as per my long-winded rant to start this blog, this tax revenue will be replaced with other taxes.

Do people really not know this?

Since you read that sentence, the government created a new tax.

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5) Introduce an “anti-flipping tax” that requires a home-owner to hold a property for 12 months.

How short-sighted is this?

Real estate is the economic engine that keeps the country running.

A person “flipping” is not evil.  That person is engaging in what the CRA calls “an adventure in the nature of trade.”  That person is lawfully buying and selling an asset, paying land transfer tax on the purchase, then sales tax on all of the materials used to improve the house and sell it, all the while, creating value in our economy.

If this person doesn’t “flip” this house, how many people have less work?  Electricians, plumbers, roofers, window installers, hardwood flooring installers, marble/stone cutters, landscapers, framers, painters, and just about any tradesperson who works on a construction site.  Then there’s less revenue for the likes of Home Depot and other suppliers, which means fewer new hires.  And what about home inspectors, interior designers, stagers, window cleaners, insurance brokers, et al?

The layperson believes that “flipping” is awful but the layperson just wants so badly to own a home!  The layperson doesn’t understand the economic benefit of a house under construction, nor does the layperson see how much tax revenue, employment, and economic activity stems from that one flip.

If a person buys a house for $800,000, renovates it, and then sells it for $1,300,000, that’s $24,950 in land transfer tax that goes to the city/province on the first transaction and then $44,950 in land transfer tax that goes to the city/province on the second transaction.  If that flipper spends $200,000 on materials for improvements, 13% of that amount goes to the federal government in the form of HST.  And when all is said and done, if that flipper declares a profit of $225,000, that money is also taxed as income.

Anti-flipping?

Get a grip.

This is a sound-byte and nothing more.

If we’re going to forego all this revenue, then we’d better stop construction on the Eglinton LRT, put a 10-year moratorium on new textbooks in public schools, and stop giving money to the arts.

Zero.
Sum.
Game.

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6) Ban foreign buyers for two years.

Why two?

Why not one?

Why not three?

This is so childish.  It’s so transparent.

People need a bad guy!  Then need somebody to blame!

One of the younger agents on my team was talking about her circle of friends and how this past weekend, they all winced and moaned about how they wanted to own homes.  They all grew up in middle-class families, all of them midtown or uptown, all of them looking to own a detached house at age 25 or 26.  They all saw the CBC Marketplace piece from last Friday (which I’ll write about on Monday…) and peppered her with assaults, claiming that it’s real estate agents that are driving up prices.

Real estate agents.

Speculators.  Flippers.

Foreign buyers.

People need a bad guy, and the faceless, nameless, legend of the “foreign buyer” has been oh-so hot over the past decade, and the government has jumped all over it.

First of all, let’s ask the government how their 15% foreign buyer’s tax is working.  I can’t find any data on this (please share if you have any), but I don’t suspect that the government has collected nearly as much revenue as they expected.

According to this source, the federal government expected that

BNN Bloomberg ran an article at the end of 2020 that I bookmarked: “National Foreign Buyer’s Tax May Have Unintended Consequence: Experts”

From the article:

When the Liberal government proposed the foreign homebuyer tax in its fiscal update last month as part of a plan to lower home prices, it drew skepticism from observers who say the policy would fall short in addressing housing affordability.

It is also drawing criticism from some experts who argue that the proposed tax, for which the federal Liberals did not provide specific details, will get in the way of economic activity and housing supply growth.

Andrey Pavlov, professor of finance at the Beedie School of Business at Simon Fraser University, who specializes in real estate risk management, says as an example, the 15-per-cent foreign buyers’ tax in B.C. that took effect in 2016 hasn’t achieved its goal. That tax, along with Vancouver’s vacancy tax, has brought negative revenue for the government, Pavlov said.

“The speculation and vacancy tax in B.C. was supposed to generate $185 million, as stated in the 2018 budget that introduced it,” Pavlov said in an interview. “The drop in property transfer tax revenue in 2019, on the other hand, was $225 million relative to 2018.”

He added that the taxes were also a disincentive to build, and an impediment to economic growth with subdued construction activity that would normally generate jobs. He said there appears to be no plan, whether through reduced regulation or lowering other taxes, to replace that loss of economic activity.

The loss of construction activity could weigh on the housing supply needed to aid affordability, an issue he expects to see nationally if the foreign buyers’ tax was rolled out across the country.

Wow, imagine that.  More unintended consequences!  More backfiring!

And that’s from 2020.  Can you imagine how much worse it got in 2021?

So what do you think will happen if/when the government bans foreign buyers for two years?

Personally, I think a lot of foreign buyers will still find a way to buy.  Buy through their cousin, or their friend, or through a numbered company.  Partner, lend, invest.  Who cares?  If a foreign buyer is looking to get money out of his or her country and into a hard asset someplace, the silly little government of Canada isn’t going to get in their way.

And then what happens at the end of Month #24?

The floodgates open.

A massive surge in demand and a huge uptick in prices.

With this particular election promise, the government has essentially put a date on when house prices are going to rise.  That is, if they understand supply and demand.

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Those are all of the demand-side “pledges” that the government made.

They also suggested that they would ban blind bidding.

They also suggested that they would, somehow, establish the “right” to a home inspection, as though that’s not already in the buyer’s tool chest, but I digress…

There’s talk of a 6-month mortgage deferral.

There’s $1 Billion worth of loans and grants for development for rent-to-own projects.

Something called a “Housing Accelerator Fund” which will include $4 Billion to create 100,000 new middle-class homes by 2024-25.  Don’t even get me started on this one, folks.  We just don’t have the time…

Another $2.7 Billion for the National Housing Co-Investment fund over the next four years.

And a 15% tax credit, up to $50,000, to add a secondary unit to your house for the use of an immediate family member.

I dunno, folks.  I don’t see anything I like here.

How about $100 Billion for publicly-owned apartment buildings across the country?  Ones that will not be sold off to a REIT at any point, and befall the same fate of ventures like Hydro One and the 407 here in Ontario.  I mean, how about the government putting a real number on building, and a real commitment to owning in perpetuity?

But then you’d have to convince the masses to rent apartments.  And why would they want to do that when the government has been leading them to believe that everybody deserves to own a house?  Not only that, but a house of their choosing, at the price they want to pay?

Build it anyway.  We’re going to need it.

In fact, the only thing the government can do to stop accelerating house prices is to make housing the number-one priority for the country, above all else, and do so in the medium and long term.  That means housing ahead of healthcare.  Housing ahead of the environment.  Housing above education, law and order, childcare, poverty, foreign affairs, racism/reconciliation, immigration, natural resources and energy, and any other issue you can think of.

There simply must be a long-term plan in this country to build.

As demonstrated above with respect to the demand-side pledges, promises, and policies that the federal government wants to implement, which will only drive prices higher, truly “addressing” house prices in this country has to come from the supply-side.

Liberals, back to the drawing board…