First National Financial LP

Residential Market Commentary - Surtax study riles industry

  • First National Financial LP

A new study funded, at least in part, by Canada Mortgage and Housing Corporation is raising eyebrows in the housing business.

Generation Squeeze, a self-declared lobby group for Canadians aged 40 and younger, received $250,000 from the housing agency to look at possible solutions to housing affordability and inequity across generations.

The lead researcher, Generation Squeeze co-founder and University of British Columbia professor, Paul Krenshaw admits there is no “silver bullet” solution for housing unaffordability and his study makes four recommendations:

  1. Align the mandates of the Canada Infrastructure Bank and the CMHC to incentivize lending to scale up green co-op and affordable purpose-built rental supply.
  2. Adjust the treatment of home prices in the Consumer Price Index, and report annually on the influence of monetary policy on the growing gap between home prices and earnings.
  3. Put a modest price on the housing inequity created by runaway home prices, via an annual (deferrable) progressive surtax on the top 10% of homes valued at over $1 million.
  4. Create a program and savings plan to transition low-density housing into permanently affordable rental units, financed by a Perpetual Affordable Housing Bond.

It is #3 – a tax on home equity – that is generating the biggest reaction.

The tax would start at .02% per year at the low end and increase to 1.0% or more, annually, for homes valued at $2-million and up.  The tax would be deferred until the home is sold or inherited. 

It’s estimated the tax could generate as much as $5-billion a year.  Proponents say the money could (not will) be used to fund affordable housing programs.  Opponents question the effectiveness of the tax, saying the key problem in affordability is the tight housing supply.

Well known industry commentator, Ryerson University professor Murtaza Haider, refers to the tax as a demand-busting measure and he does not see that as a real solution.

“If we don’t address the real problem, that is construction of new housing, and we continue to build or under build, as we have done so in the last five decades, then the problem will remain,” he says.

The Toronto Regional Real Estate Board points out that government efforts to curb demand have not been effective, so far.  Others suggest a tax applied when an owner exits their home will merely encourage those owners to stay put, keeping their homes off the market and further reducing supply.

Apart from the apparently questionable effectiveness of such a tax the focus of the Generation Squeeze study is on Millennials and Generation Z.  Boomers and Gen-Xers, many of whom have built their home equity into their retirement saving plans, were not considered.  If fact a line in the news release about the study makes reference to, “housing wealth windfalls gained by many home owners while they sleep and watch TV.”  This would appear to discount the very principle of investing.

CMHC seems to have tried to distance itself from its role in the research.  Back in the summer of 2020, reports about the agency’s funding of a study that included a possible tax on home equity received a stern rebuke from then CEO Evan Siddall.

On July 18, 2020 Siddall tweeted, “The suggestion that the CMHC is funding a study on any tax measure is inaccurate and misleading reporting. We are co-funding a Solution Lab on housing wealth and inequality. We do not control the agenda nor the research base, which is a minor component of the protocol.”  Two days later he when on to tweet that the story was “fabricated.”

During the last federal election both the Liberals and Conservatives said they had no plans to tax home equity.  Earlier this month, in a statement to the Canadian Press the government repeated that stance.

"The federal government has clearly stated several times that we will not be introducing a tax on the equity of primary residences in Canada," the government said.