Finance Committee on Oct. 23rd, 2023

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 110 of the House of Commons Standing Committee on Finance.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, September 21, 2023, the committee is resuming its study on policy decisions and market forces that have led to increases in the cost of buying or renting a home in Canada.

Today's meeting is taking place in a hybrid format, pursuant to the standing orders. Members are attending in person in the room and remotely by using the Zoom application.

I would like to make a few comments for the benefit of the witnesses and members.

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This is a reminder that all comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your patience and understanding in this regard.

I'd now like to welcome our witnesses.

With us today as an individual, we have an industry professor from McMaster University who is executive adviser to the Canadian Housing Evidence Collaborative. That is Mr. Steve Pomeroy.

From the Canadian Real Estate Association, we have the chief executive officer, Michael Bourque, and with him is the director and senior economist for housing data and market analysis, Shaun Cathcart.

From the City of Guelph, we have the mayor, Cam Guthrie. Welcome, Your Worship.

From the Montreal Economic Institute, we have the president and chief executive officer, Daniel Dufort.

We're going to start off the top with Mr. Steve Pomeroy as an individual, please.

You'll have five minutes to make an opening statement. Thank you.

[Steve Pomeroy, Industry Professor, McMaster University and Executive Advisor, Canadian Housing Evidence Collaborative, As an Individual]

Thank you, Chair.

Thank you for the invitation to appear here today.

I've undertaken extensive research in this area and published a number of papers, including one this summer in Housing Finance International. I've provided links in my brief.

I was invited only last Thursday, so I don't think you've received the brief yet. I think it will be forthcoming once it's been translated.

I'll hit some of the highlights in the brief quickly here.

First, on the issue of home prices, prices don't go up in a vacuum. They go up because consumers and investors drive them up, and they're enabled by facilitating financial conditions.

Over the last 20 years, we've seen a relatively steady growth in incomes and a very significant decline in mortgage interest rates, which together act to increase, for every dollar of earning, the amount people can borrow. It actually has been increasing over that period of time. It's a phenomenon I refer to as the “leverage effect”.

In the brief, I have prepared some charts. When you track the amount of money people can borrow at the prevailing interest rate and the prevailing median income each year and compare that with the actual MLS composite home price, they actually track almost in line. We've actually seen home prices match the capacity of the median household to pay, although not necessarily all households. It was very significantly enhanced by the decline in interest rates.

In short, prices went up because consumers and investors had the capacity to drive them up, at least until spring 2022, when we saw the bump-up in interest rates.

Another important thing that happened during this period was significant appreciation. Appreciation begets more appreciation. Those owners who already had a home had a significant growth in their wealth. Two-thirds to three-quarters of buyers are existing owners, and they're using their existing built-up equity to bring to their next purchase, whether it's for themselves or for an investment.

Essentially, what we have are people with a significant amount of equity, or bags of money, bringing that to real estate deals and competing with first-time buyers who do not have the same level of capacity to buy. It really is creating an inequity between the two groups.

When we see this increased capacity to pay and the enhancement of equity in combination with what we saw during the COVID period of a very reduced inventory of homes for sale, the obvious result is an escalation in home prices.

First-time buyers have been increasingly challenged by these high prices. Also, they are the victims of public policy. Macroprudential policies that have been introduced have constrained access to credit and prevented young families from getting into the housing market.

Really, policy has targeted the wrong actors in the system. Instead of constraining the inflationary behaviour of repeat buyers and investors, it punished first-time buyers. I think we need to review and refine some of the policies, including consideration of a tax on windfall gains from excessive sales proceeds to suppress that capacity to pay.

Turning quickly to renters, in the decade from 2011 to 2021, the home ownership rate in this country peaked in 2011 at 69% and went back down again to 66.5% in 2021. If the rate had stayed at 69%, 400,000 renter households would have become owners, and that would have taken significant pressure off the rental market, but because they couldn't access ownership, that pressure stayed in the rental market. It's been augmented by very significant increases in immigration, particularly from international students and temporary foreign workers, which is a relatively unmanaged part of the immigration system and distinct from new permanent residents. The combination of that million and the 400,000 is a significant amount of demand, massively reducing vacancy rates and driving up rents.

The critical policy issue in this area is not so much a federal one; it's a provincial one. It is the rent regulations, which allow vacancy decontrol in pretty well all provinces. With massive pressure and the ability to push up rents on vacancies, we're seeing these double-digit increases in rents in most of our cities.

While expanded supply is absolutely necessary to meet increasing demand from population and household growth, in the short term it's an ineffective solution to address the issue of affordability. We can't really build a house for four years, so there's not really going to be help coming in the short term.

Alongside those longer-term solutions, we need short-term, immediate policy change and initiatives. This includes managing population growth more carefully, particularly student visa levels, and rethinking rent regulation and the mechanism of vacancy decontrol. While a provincial jurisdiction, there's historical precedent for the federal government to encourage the provinces to revise their rent regulations, as they did in 1975. We had high inflation back then as well.

In the brief, I identify five specific recommendations that the committee could consider. I don't think I have time today to speak to those, but I'm quite happy to come back to them in the question period.

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Pomeroy.

We have received your brief. It is being translated and will be distributed to members.

Now we'll hear from the Canadian Real Estate Association. I believe it's Michael Bourque who will be speaking on behalf of the CREA.

[Michael Bourque, Chief Executive Officer, Canadian Real Estate Association]

Thank you very much, Mr. Chairman.

Thank you for inviting us here today.

We recently met with many of you during our annual PAC days, political action committee days, and we have a brief here that I can leave with a few recommendations.

I want to speak broadly about where we are in terms of the housing crisis and some of our thoughts on how to find our way out of it.

First of all, I think it's really important that people recognize that we are in a housing crisis and that it's a housing crisis that affects every single Canadian right across the housing spectrum.

Steve was talking about home ownership. People still desire home ownership. A few years ago, we did a lot of studies of millennials that I think shattered a lot of myths. We found that millennials were not prepared to live in apartments and eat avocado toast but aspired to home ownership.

Today what we're seeing is that almost 30% of people who don't own homes believe that they will never own a home, and this is why many are so angry.

In terms of what we need to do, I think that what we need, particularly at the federal level, is leadership. We need thought leadership. We need the leadership to convene other levels of government and stakeholders. We need to do this in a really systematic way so that we can work together on the solutions that are required across levels of government to create incentives, to eliminate impediments and to work together so that we can prevent this kind of crisis from happening again. It's not going to be solved quickly or easily, and so once we do work through this—which will take many years—we should create permanent solutions so that this doesn't happen again.

One of the strong levers that the federal government has is infrastructure funding, and I'm really pleased to see that the government has combined the ministry of housing with the ministry of infrastructure. The program that exists for infrastructure is a very good start, and we'd like to see those projects accelerated along with the name of the program.

We also believe that the immigration system needs to be tweaked so that we have a better match for bringing in skills for homebuilding. Of course, we should be trying to attract the best and the brightest to this country, but we also need to be attracting the people who are going to build homes, and we should be looking at that system and making the changes that are appropriate to incentivize these skilled trades to come to Canada.

That said, we're never going to hire the 4,500 carpenters that we need every year. It's just not feasible, and we're going to have to find new, innovative ways to build homes. Again, the federal government is ideally suited to incentivize and to encourage research in this area so that more efficient ways of building homes can be done at scale.

Similarly, we need innovation in financing so that there are more rent-to-own incentives for longer-term mortgages with lower rates. There are all kinds of ways that we could be more innovative in financing.

Finally, what I would say on behalf of our realtor members is that they are on the ground—165,000 people on the ground—working with people every day as they aspire to find a roof over their heads. As much as we believe in home ownership, we believe rentals are extremely important. We're seeing in the numbers that purpose-built rentals are being built, but there's still a lot of the wrong kind of inventory being produced, and so we're very welcoming of initiatives like the removal of the GST on rentals, because we do need more rentals as part of the overall housing supply.

With that, I'll look forward to questions later.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Bourque.

Now we go to the City of Guelph and Mayor Guthrie, please.

[Cam Guthrie, Mayor, City of Guelph]

Thank you so much, Chair and committee members.

I believe wholeheartedly that the day of reckoning has come, or is just around the corner, when it comes to affordability and housing for citizens across this country. I just want to encourage everybody—and that includes me—that the time to talk about this is over; we need to act and we need to act very quickly.

Mayors have the honour of being the closest to the people that we serve. Daily, we are walking around our downtowns or we're out and about at events and we get to communicate with people across our communities.

I really need you to listen to me. In my almost 10 years as mayor, I have never, ever, seen the housing affordability struggle as acute as it is today.

Families are beyond struggling. Young people feel hopeless. Newcomers, especially refugees, who came here excited for a new life in Canada are experiencing shock and anxiety due to housing and affordability problems. Businesses are struggling to be productive or to expand, because their own employees can't find affordable housing. People's mortgages are about to double, and some people who have lived in their homes for years are now completely struggling. They're going under. They're feeling helpless, and frankly, it's because they are. This is our reality. It's not just in Guelph, but across the country.

The good news is that we've all been elected to find solutions to this problem together. Working collaboratively is really what it is going to take. I want to acknowledge my own MP, Lloyd Longfield, for helping as best he can in our city when it comes to housing.

I do want to thank the federal government as well for many of the financial levers it's put in place for municipalities for our infrastructure priorities. The Canada community-building fund, which is helping to flow through provinces to municipalities, is an example.

In the 2023 budget, you had funding to address the housing crisis. This included the housing accelerator fund. I want to thank the Prime Minister for choosing to make that announcement in my city. That announcement was actually made at a permanent supportive housing complex in Guelph called Grace Gardens. That shows a true partnership between levels of government to make things happen.

The housing accelerator fund will provide financial motivation to increase housing supply growth and create at least 100,000 net new homes across Canada. The application specific to my city is going to help encourage almost 1,000 new units with financial contributions of just over $28 million to support housing. I was going to say “when we get it”, but I'm going to say that I know we're going to get that money.

Examples of initiatives that the City of Guelph is undertaking are cash-in-lieu for parking, stormwater, and parkland; developing evaluation frameworks to optimize city-owned land for supportive housing; and giving incentives to attract different types of housing. If Guelph is successful, we hope we will have this money through the housing accelerator fund this fall.

Also, just last Tuesday, my city unanimously passed a motion to ask staff to create four units “as of right”. I know this is a key push for Minister Fraser.

I believe—we all believe—that housing is a human right. It should be affordable and attainable for all people, but there is an imbalance between the supply of housing and the demand for it that is contributing to many issues, especially rental housing costs.

The market, alongside existing government funding programs and various policy levers, is not delivering enough affordable housing to meet community needs. In the last year, Guelph has seen a 27% increase in the rents for an average one-bedroom unit. What used to be somewhat affordable is now over $2,000 per month. According to rentals.ca, Guelph is now ranked the 10th most expensive city for monthly rents out of the 35 Canadian cities. The average price of homes sold in Guelph in September was $916,000.

As a city, we remain committed to working collaboratively on finding solutions to the housing crisis. Earlier this year, we developed and signed the provincial housing pledge to help the construction of 18,000 new homes by 2031 as requested by the province. Meeting this target will require building over 2,000 units per year up to 2031. This reflects a level of construction that has never been experienced before.

In addition, this pledge brings many challenges to light. They include the high cost of unlocking infrastructure, such as roads, sidewalks, water pipes, sewer pipes. Related to that are long-term permanent municipal funding strategies, especially with the critical growth-related infrastructure projects we need.

Another challenge is the significant cost that is being transferred to current and future homeowners and businesses in Guelph as a direct result of Bill 23, which reduces development charge revenues needed to build supporting infrastructure.

As well, there is a persistent, unhealthy, unbalanced low vacancy rate of below 3% on rental units that is directly linked to the lack of rental construction over the past decade.

Another challenge is the unstable supply and high cost of construction materials and the high debt-carrying costs for developers, which I often hear about. The result is that it takes a long time for these things to get built. As well, of course, as we heard, there is a lack of tradespeople.

All of this is compounded by the fact that municipalities are constrained by an outdated fiscal framework, given the realities of 2023. I know the Federation of Canadian Municipalities has really brought that to light.

I want to thank you for this opportunity to discuss these ideas here today. I believe we have no time to waste. We are in a housing crisis and we must act now and act together.

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mayor Guthrie. We look forward to the many questions that I'm sure you'll receive.

Now we go over to the Montreal Economic Institute and Mr. Daniel Dufort.

Go ahead, please.

[Daniel Dufort, President and Chief Executive Officer, Montreal Economic Institute]

Thank you, Mr. Chair.

First of all, let me thank you for the opportunity to come and speak to you today about an issue that is important not just to the Montreal Economic Institute, but to all Canadians.

I also want to note the presence of Cam Guthrie, the Mayor of Guelph, a leader by virtue of his dynamic approach and dedication to implementing policies that offer real solutions to our housing challenges.

In recent years, home sale and rental prices have both risen dramatically, putting significant pressure on the budgets of Canadian families. Households are already dealing with the impact of inflation and the accompanying higher interest rates. Because of these factors, the dream of becoming a homeowner seems more and more like a mirage for many young, and not so young, Canadians.

According to the CMHC, we will need no fewer than 5.11 million new homes over the next eight years to return to 2004 affordability levels. In other words, we will need to build as much in eight years as we did in 24 years. The task seems herculean, but that doesn’t mean we can’t improve things significantly. To do so, we need to act quickly.

Bureaucratic control over the kind of housing that can be built is a hindrance from coast to coast to coast. Economic studies show that, regardless of the price of a new build, it triggers a chain of displacement that frees up housing in every price range, including units that are affordable for the lowest income quintile.

According to a study by Professor Evan Mast of the University of Notre Dame, for every 100 luxury units built, 45 affordable units are freed up for people earning the median salary, including 17 for those in the bottom quintile. That's actually quite a conservative estimate, the most conservative one in the study.

Of course, provinces and municipalities are responsible for the housing and zoning policies that restrict supply. They come up with plenty of reasons to restrict real estate development, such as favouring so‑called human-scale cities or slowing urban sprawl. The fact remains that, every time projects are rejected, delays extended or fees tacked on, that inevitably drives housing prices up. The logic is inexorable.

The federal government is limited in its ability to act on these matters, but it can provide powerful incentives and play a convening role. I would note that a number of prominent politicians in Ottawa have advocated for this idea in recent years, and there has been progress on this front.

However, we must not get sidetracked by short-sighted populist solutions, such as the idea of restricting short-term rentals. That kind of federal intrusion into private law may be popular among a handful of activists, but its effect would be minor, while leaving us less free to make decisions in our own best interests.

In conclusion, allow me to reiterate that we are facing a problem of supply, which is quite simply not plentiful enough. The country is producing housing units at a 1973 pace, but the population has grown by 78% since then. In other words, the population is up by 78%, but housing starts are stagnant at 0%. It's a supply problem.

The only way to make things better is to allow real estate developers to build more units of all kinds.

Thank you. I look forward to answering your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thanks to all the witnesses. It sounds like everybody's ready to roll up their sleeves and work in a collaborative way here to get some solutions to housing.

We're going to move right into members' questions. For the first round of questions, each party will have up to six minutes to ask questions of our witnesses.

We're starting with MP Chambers for the first six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Welcome, witnesses. We have a very good panel here today.

I will start with Mr. Dufort.

I think you said that for every 100 units built, regardless of where they are—or perhaps at, say, the upper end of the market—45 other units will be freed up about along the chain below. Is that right? Can you explain a little bit more?

[Daniel Dufort]

Yes. That's for the median-income owners. That's a study done in 12 large American cities by Evan Mast. I can send it to you. Then it's 17 for the very last quintile of earners.

In Helsinki, there was another study that's even more striking. In that case, it was houses built at market prices, and not only luxury units, which is the extreme example of the Mast study. In the one in Helsinki, for each 100 units built, 66 units were made available for people below the median income, and 31 for the very last quintile.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Just so I understand, if we have a market where there's significant demand, when you can move an individual or a family into a new home, that frees up, obviously, the current residence, which frees up the one below it, which would free up the one below that.

Is that the basic economics?

[Daniel Dufort]

This is the exact logic of it.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Mr. Bourque, thank you for coming. We heard last week some testimony from the Canadian Home Builders' Association that said they were following the new Natural Resources Canada building code.

In your experience, since your members are involved with sales of new homes and transactions, has your organization looked at how much cost will be applied to each house for the changes to the building code that are proposed?

[Michael Bourque]

Yes. We have looked into that whole issue. I could probably follow up with the exact cost that we came up with, but generally speaking, what we're concerned about is that too many requirements are being loaded onto a homeowner. They would have to incur those costs before selling, which then is a disincentive to sell the home.

For example, if an older person is living alone in a large house and they want to downsize, they are faced with the cost of having to do some kind of retrofit before the sale. We have taken the position for a long time that we don't want that kind of regulation, because it will stagnate the market and prevent people from moving.

As Mr. Dufort pointed out, when you have movement in the housing spectrum, it frees up other units, so that's desirable.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Feel free to table that, and any analysis or information you have on that.

[Michael Bourque]

Absolutely.

[Adam Chambers, Conservative, Simcoe North, ON]

Just so I understand, or for committee members, if someone wishes to sell a home that is, say, below a prescribed standard, their options are basically to incur the cost to retrofit that home before it can be sold. Is that basically your understanding?

[Michael Bourque]

Yes, that's the concern. You don't want this being imposed before a sale.

It's important to have standards, and one of the benefits of building a lot of new product is that it's, of course, going to meet the highest standard. However, the person selling should have the choice of whether they sell it as is or not, and they shouldn't be forced to have to do that upgrade before they sell it because many of them wouldn't be able to afford to do that.

[Adam Chambers, Conservative, Simcoe North, ON]

I assume what we could end up seeing is a lot of people just not selling the home.

[Michael Bourque]

That's exactly the point. If they don't sell the home, then that's a real problem.

[Adam Chambers, Conservative, Simcoe North, ON]

Right. It then ties up inventory for longer if they can't have another option. They can't sell or they have to incur costs before they sell.

[Michael Bourque]

Yes.

[Adam Chambers, Conservative, Simcoe North, ON]

It sounds to me like the government hasn't really thought this through.

[Michael Bourque]

Well, it's a struggle.