Finance Committee on Jan. 24th, 2022

[Véronique Laflamme]

Yes. Thank you for the opportunity to talk about it.

We share the same view with regard to so‑called affordable housing. As my colleague said, the housing isn't really affordable. It's funded by the rental construction financing initiative, for example. Sometimes, the rent can be $2,000. These units are funded by the government, but they aren't affordable for households in core housing need.

I could provide other examples of initiatives intended primarily for the private market, since this was documented by the parliamentary budget officer.

We're proposing the following solution. Make sure to fund housing programs outside the private market and ensure that all initiatives prioritize social housing over so‑called affordable housing.

Social housing can be public housing developed by municipalities, for example. In Quebec, municipal housing offices do this, but it can be done in different ways. It can also be co‑operative housing or housing developed by non‑profit organizations. The advantage of this type of housing is that, if the programs are properly funded, the rent for low‑income tenants will be set according to their income. This ensures that the rent reflects their ability to pay. In addition, over time, the rent paid by other tenants will tend to fall behind the rates in the surrounding market. This is the opposite of the inflationary effect seen in private market construction.

We believe that this plays a key role in the solution.

Thank you for your question.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Laflamme and Mr. Blaikie.

We will now move to our second round of questions. The Conservatives are up.

Mr. McLean, you have five minutes.

[Greg McLean, Conservative, Calgary Centre, AB]

I'll start with you, Mr. Cross. Thank you for coming here today.

Mr. Cross, there are three types of inflation that we understand in economics: monetary inflation, asset price inflation and consumer price inflation. Of course, the starting point for all of these types of inflation is the monetary inflation. Would you agree that pumping half a trillion dollars into the Canadian economy in monetary inflation has led to asset inflation, principally landing in the housing market?

[Philip Cross]

As I mentioned at the beginning, there's no question that you can't have inflation without an expansion of the money supply. The problem is that it's not a one-to-one relationship. You can't say that if the money supply increases x per cent, you're going to get y per cent inflation, and you certainly have a lot of trouble saying you're going to get z per cent inflation in a subcomponent of the economy like housing. But clearly there's a broad association there.

It's not just the monetary stimulus; it's also the fiscal stimulus, all this money that we transferred to people. It wasn't just low interest rates, and it wasn't just that we maintained incomes; we substantially increased people's incomes. That gave them the wherewithal to make down payments, to meet the criterion for buying a house.

So the two go hand in hand.

[Greg McLean, Conservative, Calgary Centre, AB]

That's correct, and if you think about it, the other financial assets have also increased significantly. Those people with financial assets, including houses, had no other place to go but to put more money into financial assets.

Specifically related to housing, when you look at the investment in housing, when the risk-free rate is 0.25% and people are racing towards what looks like an asset inflation environment, is housing the natural place for investments in Canada?

[Philip Cross]

First of all, let's go back to what I mentioned about the Bank for International Settlements. They've been warning about asset price inflation basically ever since the great financial crisis of 2008. That includes Canada. Housing prices in this country exploded when the Bank of Canada first lowered interest rates in 2015. We didn't have quantitative easing like a lot of other countries did at that time, so it's more complex than just saying we had QE and that all went into the housing market. Clearly there is an association there, but it's a lot more complex than that.

[Greg McLean, Conservative, Calgary Centre, AB]

Okay. Let's go back to asset price inflation, because some of the other economists we've heard from on this panel are talking about building an extra 1.8 million homes in Canada.

The problem with building 1.8 million more homes is that we already represent a larger percentage of our economy in residential construction in Canada, it being over 11% at this point, when historically that's about double the percentage of the economy that we should be occupying with residential construction. If you push more incentive into residential construction, are you not automatically pushing up the base price of those assets?

[Philip Cross]

Well, there's no question. Because of high immigration rates and historically low interest rates, we've done everything possible to boost demand, and we weren't conscious of whether supply could possibly adjust to meet that. The result has been this explosive increase in prices. Undoubtedly, that's—

[Greg McLean, Conservative, Calgary Centre, AB]

Let's jump into that a little more if we can, please.

We have an explosive increase in the products it takes to build a house, yet you look at timber prices and they haven't increased that much in Canada. Tell me where that disconnect is between the actual raw material increase and the actual construction material increase. Where is the value actually being escalated as far as inflation goes?

[Philip Cross]

I'm not sure I follow the question.

[Greg McLean, Conservative, Calgary Centre, AB]

We have timber that really hasn't.... It's the same thing in the food markets. You have beef costing more at the store, but cows on the hoof are not getting the same increase in price.

[Philip Cross]

Okay, I think I know where you're going with this.

Obviously, most of the value has been captured by people already owning existing homes. It's not going into the construction of new homes. It's not going into the value-added chain. It's been captured as higher prices by existing homeowners.

[Greg McLean, Conservative, Calgary Centre, AB]

So—

[The Chair, Liberal, Peter Fonseca]

Mr. McLean, that's five minutes. Thank you very much.

We are now moving to the Liberals and Madame Chatel for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

I obviously want to find solutions to the housing inflation issue rather than inventing cute but useless nicknames.

Mr. Cross and Mr. Perrault, you both said that the core issue is population growth related to immigration. In some parts of the country, there's more immigration and therefore more demand for housing. This is a federal policy issue, but the policy to increase the supply of housing units in the market is a municipal issue. Recently, our Minister of Housing announced that a summit will be held next month involving the federal, provincial and municipal levels. The key is to coordinate our policies to ensure that the municipal level can create more housing.

My first questions are for Mr. Perrault.

What advice would you give us in relation to this summit? What barriers are preventing the municipal sector from creating the supply that Canadians need?

[Jean-François Perrault]

Good question. If there were an easy answer, we would have resolved the issue, or at least had some potential solutions in recent years.

I think that the root of the issue is largely political. As you said, the government determines how many people enter the country. However, ultimately, the cities, and particularly the city councils, have a great deal of power over where these people will be placed and what support they'll receive in the cities. We must find a way to change the incentive structure so that the interests of the council members and the people who live in the cities are more or less in line with the interests of the federal government, and therefore with national interests.

The solution may lie in the transfer of significant financial incentives to the cities. Various things can be done to try to balance the incentives. In my opinion, this is where the issue lies. Like it or not, the “not in my backyard” syndrome is a particularly powerful factor in holding back real estate development to some extent. Basically, you end up with less housing, and both tenants and owners are paying more.

[Sophie Chatel, Liberal, Pontiac, QC]

Mr. Cross, as you pointed out earlier, Monsieur Perrault was correct in mentioning that the core of the problem is really that federal policy and the demographic increase are not matched by the municipalities and their supply.

The government announced a summit in a month's time with the municipalities. What would be your recommendations to make sure that those policies align [Technical difficulty—Editor] and that we ensure that the municipalities are producing at the level of the [Technical difficulty—Editor]?

[Philip Cross]

I'm sorry. Your screen froze for a second.

Before I get to recommendations, I would add that the situation is even more complicated than we have portrayed it up to now, because of the pandemic. You may have noticed it was highly publicized in La Presse recently and some other papers that the population of our major urban centres, particularly Montreal, declined sharply during the pandemic. People are moving to Terrebonne and other areas outside of our large urban centres. An additional complication of matching supply and demand is that, geographically, demand has made yet another change over the last year. That's going to make things more complicated.

What are my recommendations? No matter what you do, it's going to take years to fix the supply response. As Mr. Moranis said, we're looking at a huge structural deficit. At current rates of building, it's going to take a decade just to put a dent in this problem, so there are not going to be any easy answers. Perhaps, rather than talking about supply, which is what most of the focus is on, maybe we should be talking about reining in demand, about slowing down immigration. What's the point of allowing immigrants into this country if there isn't a place to house them?

[The Chair, Liberal, Peter Fonseca]

Thank you. That is the time.

We are now moving to the Bloc and Monsieur Trudel for two and a half minutes.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Thank you, Mr. Chair.

Ms. Laflamme, thank you for your response earlier.

You and Ms. Raza made the case that the government is investing money supposedly to create affordable housing, when in fact it isn't only failing to house the most vulnerable people, it's helping to drive up current prices. It doesn't make sense.

However, two years ago, the government launched the rapid housing initiative, or RHI. This program isn't inherently bad. The initial funding was $1 billion. An additional $1.5 billion was invested later. A good feature of this program was that it helped develop rapid housing.

Ms. Laflamme, as you know, in social housing programs, federations and co‑operatives, it can take five, seven, eight, or 12 years to build the units.

Do you think that the RHI is a good program and that it should be promoted and funded more? If not, what are the solutions for building social housing quickly in Quebec and Canada?

[Véronique Laflamme]

Thank you for your question.

The rapid housing initiative is different from the other national housing strategy programs. It's the only program whose affordability requirements are clearly based on the tenants' ability to pay rather than on current prices, which doesn't work, as we saw earlier.

In addition, this initiative is restricted to public or non‑profit developers. It's the only one clearly geared towards housing that falls outside the private market and that's truly affordable. For us, it's a good initiative. It's appreciated throughout Quebec and Canada because it funds 100% of the development costs, which helps us to move forward much more quickly than when we must put together complex financial packages.

However, it's the only one‑time initiative for which no 10‑year funding has been announced. There was a phase 1 and a phase 2, and that's it. While this is the only initiative clearly intended for housing outside the private market and targeting the most vulnerable people, the program has no continuity, unlike the other initiatives. It would therefore be good to see this program renewed.

In addition, there's a lack of personal assistance. For example, in Quebec, the government must pay for the rent supplement to help low‑income tenants, who often need support to pay the rent, even though the development costs are covered. Quebec must also pay for community support, because this program is intended for people who are homeless or in very vulnerable situations, such as senior tenants or indigenous people living in urban areas. Often, community support is also needed, and it isn't funded by Ottawa. This gap must be addressed.

As I said, this initiative is intended for people in very vulnerable situations. We've seen that the tenant households in Quebec and Canada in core housing need include modest‑income households whose only issue is that they don't have enough income to pay rent. Social and community housing is needed for these people as well. Other programs require funding. This can be done, for example, through increased transfers to the provinces—

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Laflamme and Mr. Trudel.

We're now moving to the NDP with Mr. Blaikie for two and a half minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you.

Mr. Perrault, I want to come back to something you mentioned in your testimony about the extent to which low interest rates, particularly in an inflationary context, are encouraging certain kinds of investment in the housing market. You said that, in your opinion, if I understood you correctly, interest rates have to go up in order to defeat some of these incentives.

Do you have a sense of where you think interest rates have to get to in order to accomplish that? What do you think the impact would be for folks who currently own houses and are leveraged to the hilt in order to have acquired those houses? What would that mean for the Canadian economy?

[Jean-François Perrault]

Thanks, Mr. Blaikie, for the question.

There are a couple of points on that. We do think interest rates need to go up, but they need to go up principally to try to bring inflation back into the realm of the Bank of Canada's targets. That's the principal driver now. Of course, by raising interest rates, you are going to cool the housing market in principle. There's no question about that.

One way to think about where interest rates need to go is.... We estimate the neutral rate for the Bank of Canada at about 2.5%. Currently, those rates are 25 basis points, and at least 200 basis points or two percentage points of tightening is required, in our framework, for the Bank of Canada to no longer be stepping on the gas, if you will, and to just be in neutral and not stepping on the brakes either. You're looking at something like 200 basis points just to bring you closer to balance.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

How confident are you in current homeowners' ability to absorb that kind of interest rate without having to sell their homes?