In early April, the Canadian government is set to reveal the 2022 federal budget, with government sources telling reporters that it will be a “back to basics” document. In other words, it is a post-pandemic budget that addresses the broad array of fresh economic challenges on the other side of the public health crisis and the geopolitical uncertainties stemming from Russia’s invasion of Ukraine.
Prime Minister Justin Trudeau is expected to release a more “prudent” budget, which scales back the myriad of COVID-related benefits and aid packages. At the same time, the Liberal budget will still need to venture through murky waters amid skyrocketing price inflation and global supply chain issues that were apparent before the military conflict in Eastern Europe.
“With COVID restrictions being lifted at long last, the focus in this year’s budget can shift from economic support and recovery measures to initiatives that stimulate economic growth,” according to an EY report. “As always, there will be tax measures, some of which were proposed during last year’s election campaign and the government’s fall economic and fiscal update.”
But industry observers purport that the prime minister and his government need to spotlight another component of the Canadian economy that is leaving too many people on the sidelines: real estate prices and housing affordability.
The Canadian real estate market continues to grow at an impressive pace. In February, average Canadian house prices surged 20 per cent to an all-time high of $816,720. Even when Toronto and Vancouver are removed from the equation, the average sales price for a residential property is north of $638,000.
Indeed, the housing affordability crisis is becoming apparent across the country, from major urban centres in British Columbia and Ontario to the rural communities of Atlantic Canada.
Will the 2022 federal budget target these concerns?
What Will Ottawa Do for the Real Estate Market?
Over the last year, there have been many policy prescriptions proposed as a cure for soaring housing prices, but some argue that these measures would only deepen the affordability hole. From a suggested capital gains tax on home sales to the suspension of foreign home ownership, there have been many discussions among market analysts, economists, academics and officials.
While experts do not think an introduction of new higher tax schemes will be announced amid this inflationary environment, they do anticipate that the Grits will reintroduce most of their 2021 campaign platform promises.
In 2021, the Liberals pledged to ease housing prices. One of the promises was a doubling of the First-Time Home Buyers’ Tax Credit from $5,000 to $10,000. Another proposal was creating the First Home Savings Account (FHSA), a plan that consists of tax-free contributions and withdrawals of up to $40,000 for Canadians under 40. Trudeau had further pledged to “cool excessive price growth” in the real estate market by mandating that residential properties be held for a minimum of 12 months to receive the principal residence tax exemption.
Because it would take time to structure the policies and manufacture the necessary framework, housing and finance professionals believe these ideas would not go into effect until 2023.
Meanwhile, in December, the federal government introduced Bill C-8, slapping a one-per-cent annual tax on the value of vacant or underused homes owned by non-resident, non-Canadians. The legislation passed the second reading in early February, and the bill is now being assessed in committee.
Tax experts suggest that Ottawa could re-examine some previously discussed measures to further crack down on housing investors. This could include reconsidering the tax treatment of Real Estate Investment Trusts (REITs), down payment requirements for investment properties, and home equity lines of credit to fund the down payment on a rental property.
In a recent report, KPMG urged the Liberal government to strengthen its Environmental, Social and Governance (ESG) commitments by homing in on strategies to enhance housing affordability and accessibility.
Supply, Supply, Supply
All three levels of government have considered some form of intervention to curb red-hot housing prices, be it taxation or regulation. However, the consensus within the sector is that new supply needs to be injected into the market. The latest new housing construction activity data brought some relief on this front.
According to Canada Mortgage and Housing Corporation (CMHC), the annual pace of housing starts rose eight per cent month-over-month in February, totalling 247,256 units. Most of the gains were concentrated in urban starts of apartments, condos and multi-unit housing projects, rising 13 per cent. Single-detached urban starts edged up two percent to more than 60,000 units.
The overall six-month moving average of the monthly seasonally adjusted rate (SAAR) of housing starts was 251,579 in February, slightly down from 253,864 in January.
In the coming months, many market analysts will be monitoring higher interest rates and their effects on the sizzling housing market. With the Bank of Canada (BoC) pulling the trigger on a 25-basis-point rate hike at the March policy meeting and promising more rate hikes are arriving this year, there is a modicum of expectations that meteoric price growth could finally cool off.
With demand remaining strong and inventories continuing to trend at historic lows, many homeowners and homebuyers will be monitoring the 2022 federal budget with bated breath.