Want to fix the unaffordability crisis in Canada’s two largest cities? Building more new homes may be a better way to go about it than taxing foreign buyers, the Canada Mortgage and Housing Corporation said Wednesday.
That is a key takeaway from a new report by the agency, which concluded that the housing price surge experienced by Vancouver and Toronto is, in part, the result of a failure to create enough living spaces to meet demand from both new residents and investors.
The research appeared to question the effectiveness of recent provincial measures aimed at limiting the flow of capital from abroad into the Vancouver and Toronto, such as a tax on foreign homebuyers.
“Measures targeted at alleviating supply challenges are more likely to have positive impacts on high-priced markets than measures focused on the demand side,” the agency said in a statement.
Over half of Vancouver and Toronto homebuyers recently polled by CMHC believed that foreign buyers have an impact on local home prices. And on Tuesday, the agency released data showing that nearly 10 percent of mortgages issued to people under the age of 25 in Vancouver and Toronto in 2016 went to non-permanent residents. This signifies “some younger NPR (non-permanent residents) may be receiving parental support to purchase homes,” it noted.
Today’s report, however, points to weak housing supply as a main culprit for runaway prices.
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“When you have weak supply responses, as you do in these markets, prices have nowhere to go but up,” said Aled ab Iorwerth, deputy chief economist at CMHC.
The trouble, according to the report, is that the pace at which both cities increased their housing stock was much slower than the pace at which both received new inflows of people wanting to settle and buy a house there. By contrast, in Montreal, Calgary and Edmonton, housing supply and demand remained roughly aligned, with home prices climbing at a much slower rate.
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The research shows the weighted average home price in Vancouver rose nearly 50 per cent between 2010 and 2016. Population growth and climbing local disposable incomes, coupled with low mortgage rates, accounted for 75 per cent of that growth, according to CMHC.
In Toronto, home prices rose by 40 per cent over the same period, with 40 per cent of that growth attributable to those conventional economic factors.
According to the CMHC, much of the unaccounted-for price growth was due to policies restricting new residential construction – especially of new single-family homes.
In both cities, price growth was driven by detached homes, which faced the biggest supply shortage. In the condo segment, where the supply-demand mismatch wasn’t so severe, prices climbed at a slower rate, the report shows.
“Supply responses have been proportionately greater for condominium apartments than for single-detached housing,” the CMHC said.
The report follows new data released by Statistics Canada late last year that showed that non-residents homeowners account for 3.4 per cent of homes in Toronto and 4.9 per cent in Vancouver. While that number appears low, several economists and housing experts say the share of foreigners buying homes in a given period may be significantly higher, with potentially sizable effects on prices.
But CMHC noted that the same StatCan numbers also show that the percentage of non-residents homeowners is higher for condos, which didn’t see as pronounced a price increase as single-family homes.
Understanding the extent to which foreign capital affects home prices in Canada remains extent “a persistent challenge,” the report said.
– With a file from Reuters