Today’s election day in Canada, and this time tomorrow the country will be bracing itself for one of two plans. There’s no shortage of partisans willing to discuss the positives of each plan, so we thought we’d do something different—discuss the risks of each plan. Let’s talk about comically unrealistic (and reckless) housing targets, and party promises that sound great—but hide predatory details that will cost you more.
Canada’s Next Prime Minister Has Unrealistic Housing Targets… Regardless of Who’s Elected
First off, we’re only going to focus on the two parties that can possibly capture the top spot in the country: The Liberal Party of Canada (LPC), led by Prime Minister Mark Carney; and the Conservative Party of Canada (CPC), led by long-time Member of Parliament Pierre Poilievre. Other parties are expected to make substantial contributions to government such as the NDP and Block, but they will be fighting for representation in the plan led by the two leading parties. Got it? Great!
Being optimists, let’s start on a positive note and discuss what the two leading parties have in common—unrealistic homebuilding targets. The average annual target for new homes that both the LPC (500k/year), and CPC (460k/year) are comically absurd. They could have said a trillion homes per year, and the odds of hitting that target are only marginally different.
The LPC may have a new leader but its housing target was the same pitch that PM Trudeau made. At close to double the record volume set a few years ago, his plan was criticized as “not making any sense” by prominent economists. No one seems to mind that similar promises are being made by the two leading candidates.
Canada would have to completely restructure its labor supply to even get close to either of those targets. It would also take roughly 4x the share of GDP dedicated to housing than the US did during its Housing Bubble in 2006-2008. Both leaders are effectively promising to amplify economic risk by over concentrating resources into housing.
The rest of the world is trying to figure out how to cope with artificial intelligence (AI) obliterating jobs. Canada is focused on how it will warehouse massive immigration flows, since everyone will want to move here to either build homes or sell them.
But wait—there’s more! Most people have heard the supply and demand shtick, and see this as the path to cheaper housing. That discounts the fact that supply and demand applies to all parts of the supply chain, and inducing excess demand means raising the cost to build a home. The CMHC discussed this point, noting that home prices need to rise in order to keep supply flowing. Unfortunately, they didn’t do this in public—it was in an interoffice chat session, contradicting their public statements.
The post-building affordability boom people are thinking of comes when the recession hits at the end of the business cycle. The overallocation of labor to housing is corrected, meaning a labor misallocation is created. That’s how fancy folks say unemployment rises as people find new careers, and landlords drop prices to accommodate the neuvo unemployed.
Now let’s break down some party-specific promises.
Liberal Party of Canada (LPC) Housing Platform
The LPC housing platform largely resembles a lot of the same things we’ve seen in recent years. If you’re thinking, isn’t that how we got into this problem? That’s correct, but to be fair—they are incorporating some new plans to screw the average person as well.
Stimulating Investment
The LPC is promising to stimulate housing investment by “capitalizing private capital,” and making housing a more attractive investment. Most people in Canada would be surprised to hear there’s a lack of private capital for investment, and the details seemed scarce on how exactly this works.
Bob Rennie, Vancouver’s “Condo King” provided some insight into part of this plan. Rennie explained earlier this year that he was working with Team Carney to implement a foreign investment scheme to build purpose-built rental apartments, backed by the CMHC.
The plan resembles the one that Vancouver embraced in 2013, when condo demand collapsed. The public was sold on the idea that marketing condos overseas would help create more supply, and thus improve housing costs. Vancouver is now Canada’s most affordable city, or something. I can’t recall how it worked out.
Housing Accelerator Fund
The LPC is also promising to “build on the success” of its Housing Accelerator Fund. The multi-billion fund was used to stimulate building, and plans to do a wide variety of things—from reforming zoning to pledging tens of billions to prefabricated homes. It’s often claimed as a successful cornerstone of the party’s housing plan over the past few years.
Despite the narrative, the spending hasn’t done much to actually build more. Not my opinion, but the non-partisan Parliamentary Budget Officer (PBO) warned the $70+ billion plan was largely taking credit for existing supply already in the pipeline. That was back in 2021, and since then a lot more cash has been pumped into this scheme. If the additional funds didn’t help stimulate new building, that means it helped to make existing projects less efficient, inflating home prices and profits.
As for red tape removal such as zoning reform, it’s a serious problem that can improve input costs. Delays and increased application complexity can add a significant amount to builder costs. However, abruptly removing them can make things worse if there’s no consideration to how it’s done. Since zoning is a price fundamental, acts like broad upzoning raise input costs immediately, making new buildings less viable—a problem we’re seeing almost everywhere that does it.
Prefabricated Homes
The Build Canada Homes project also plans to spend tens of billions on prefabricated homes. The LPC plans to bulk order units from manufacturers to create “sustained demand.”
Once again, artificial demand is designed to prevent cost corrections and bolster prices. In the context of Canada, experts have found that prefabricated homes don’t save much (if any) money vs the existing way homes are built.
Also, it probably isn’t a coincidence this plan would generate a significant opportunity for a business the party’s leader has deep connections with.
Conservative Party of Canada (CPC) Housing Platform
The CPC platform is almost the opposite of the LPC platform, but has just as many issues. The LPC platform is focused on spending more to create private opportunities, whereas the CPC platform makes cuts to, well… create private opportunities. Their plan focuses on slashing costs, shifting the liability from homebuyers to the general taxpayer—while not necessarily improving affordability.
Axe The Tax On GST For Homes Under $1.3 Million
Buyers currently pay tens of thousands in federal sales tax when they have a home. The CPC wants to remove these taxes, hoping to save hard pressed budgets at a huge cost. Great, but would it work?
It may work in some cases, briefly. In Canada, the cost of housing is largely detached from input costs and more closely resembles credit availability. If input costs are not connected to reality, a reduction doesn’t change the market price—it widens profits. Studies have shown repeatedly that credit plays a large role here, with any excess credit ease consuming reduced carrying costs.
The reduced GST collected also means reduced revenue, transferring the liability to all taxpayers. Effectively this plan is most likely to just transfer the cost to the public, either via taxes or reduced public services.
Slash Development Charges
In Canada, development charges can add six figures to the cost of a new home. Yes, municipalities leverage a tax so large it would equal the cost of a new home in many countries. The CPC promises to reimburse municipalities by slashing these charges by doing things like reimbursing them with up to 50% of the funds they give up, up to $50k per homebuyer.
Once again, most new homes aren’t trading at prices closely related to input costs but closer to market prices. When this happens during a period of high demand for housing, discounted input costs are captured by the seller.
The reduced expense recouped by the federal government is socializing the development costs. A household living in a more efficient region for development costs shouldn’t have to subsidize the inefficiency in other regions. Countries with lower, or no, development charges usually recoup it with property taxes since the shared infrastructure costs improve the value of all homes in the region.
Cutting Zoning Red Tape
The CPC is effectively promising the same thing as the LPC when it comes to zoning—pre-zoning. Builders can break ground on land that is already built, with no community or local government feedback.
Once again, since zoning is a price fundamental for appraisal, the CPC is promising to increase land costs ahead of any plans to build. While this will help builders sitting on speculative land assemblies hoping to accelerate the process, it will raise the input costs for any builder who traditionally creates an assembly and then has it upzoned.
That means less building, more expensive housing, and overriding community planning. This is often seen as eviction by zoning, since the state determines the use of land. There are countless examples of small buildings leased by restaurants being rezoned to 20+ story towers, resulting in the restaurant either needing to shut down or pay taxes equivalent to the 20+ story tower. Cities need to grow but they need to balance that with the rights of those who helped it grow. That’s why community consultation exists, and shouldn’t be automatically overridden by higher level policymakers.
How did both parties manage to take the opposite approach to policy, but end up with equally predatory plans? It started with the shift of what’s considered affordable housing, with the definition now reflecting market prices in some regions. Policymakers are now using state resources to build middle class housing, backstopping home price corrections. That backstop has made the market so inefficient that it can no longer function without taxpayers funneling more cash per home—whether that be directly or via assuming a liability, such as foregoing revenue.
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