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Canada’s sixth largest bank is urging policymakers to “proceed cautiously” with any efforts to cool the Canadian housing market, suggesting a misstep could have harsh economic and fiscal repercussions for the country.
In a report published this week, National Bank economists Warren Lovely and Marc Pinsonneault argue in favour of “focusing on housing supply shortages rather than tackling affordability worries via policies that could seriously undercut demand.”
“Pursuing the latter path risks opening up a gaping hole in Canada’s consolidated budget balance,” they write in the report, titled (Cash) Cow Tipping?
Their analysis follows the BC government’s recent Metro Vancouver foreign-buyer tax, which is an example of a demand-side measure — one that could net the province hundreds of millions of dollars annually, National Bank says — and talk of the possibility of a similar tax being implemented in Toronto.
The four-page commentary emphasizes how the Canadian economy has become more and more reliant on the housing market in recent years and suggests that any measures spurring a serious downturn in the sector’s activity, driven largely by the BC and Ontario markets, would be costly.
National Bank estimates federal, provincial and municipal governments rake in a combined annual total of around $120 billion — 6 per cent of the annual nominal GDP — from housing-related sources. This works out to 17 per cent of consolidated government revenue, not including social security funds, such as the Canadian Pension Plan.
“What I was trying to point out is going hand-in-hand with that large-scale economic exposure is some very significant fiscal exposure at all three levels of government and in all corners of the country, and as a result, a policy response… needs to be mindful of not just merely GDP risks, but revenue risks, at these various levels of government,” Lovely tells BuzzBuzzNews.
The report looks at how, and to what extent, residential real estate is a revenue driver for all levels of government, from property tax windfalls for municipalities to federal and provincial gains from income/consumption taxes.
“We want to stress that up till now, federal-provincial ties to housing related activity have been more a fiscal blessing than a curse,” the National Bank report reads. “But there are significant housing-related revenue streams at the higher levels of government that would clearly be at risk should housing falter.”
By way of example, National Bank cites land transfer taxes in BC and Ontario. Together, the provinces are on pace to net $1 billion more in revenue from land transfer taxes this year than had initially been budgeted for.
National Bank is not the only observer to recently note the importance of the housing market to Canada.
Earlier this month, the Canadian Home Builders Association published its 2015 Economic Impacts of Residential Construction report which found one in 18 working Canadians had a job related to residential real estate last year.
While heightened housing activity is big money for Canadian governments and residents alike, National Bank’s Lovely provides insight into why policymakers may be tempted to introduce measures to curb demand rather than increase supply to improve affordability.
“The advantage of the demand side, like a tax, or something, is that it can be implemented quickly, easily, and immediately. Supply side, like increasing the supply of housing in a red-hot market takes more time,” he says.
“Often times there’s regulatory or zoning or council issues to address and you don’t get the immediacy of a demand-side lever,” Lovely continues.
As for what specific supply measures could be effective, in an email to BuzzBuzzNews Pinsonneault suggests transit investments that would make more-affordable outlying communities accessible for more buyers and further intensification through the creation of still more condo and rental units.
“With so much at stake — economically and fiscally — policy makers would be wise to tread very careful,” Pinsonneault and Lovely write. “This is one cash cow you don’t want to tip over.”