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Policy Matters: Lessons in Housing from the United States

Policy Matters: Lessons in Housing from the United States

Canada is in a housing crisis. We don’t have enough units to meet our current or future needs, and demand outpacing supply continues to put pressure on the cost of a home.

Canada is in a housing crisis. We don’t have enough units to meet our current or future needs, and demand outpacing supply continues to put pressure on the cost of a home.

According to the Canada Mortgage and Housing Corporation, restoring affordability will require us to build 3.87 million new homes by 2031 (that’s in addition to what’s already in production), and it will cost roughly $1 trillion to do so!

Despite the almost $100 billion allocated to the problem via the National Housing Strategy, the 2023 Fall Economic Statement and Budget 2024, government will never get close to the investment needed — nor should it. But if government were to take a lesson from our southern neighbour, the United States, and tackle the problem of financial gridlock, it could enable the private sector to reach the necessary investment levels.

Current government regulations and taxes are discouraging private sector investment enough that Canadian developers are taking their business to the United States. So, what’s our neighbour doing that is attracting rather than deterring the types of investment we need?

The United States is keeping capital in the country through tax incentives

When the Inflation Reduction Act was signed into law by U.S. President Joe Biden in 2022, the Canadian government understood it needed to come up with incentives of its own to, a) ensure Canada remained an appealing place to do business; and b) prevent a greater share of global and domestic investment heading to the United States. Allowing investment to leave Canada would constitute a considerable failure with long-term economic consequences — potentially leading some industries to the point of crisis.

Well, the housing sector is in crisis now, but there are no investment tax credits for companies that build homes. This means developers absorb the cost of the taxes during production, which can take years, only recovering the losses at completion— leading to higher home prices.

Thanks to this tax system, developers use the money they could be investing in new projects to cover the cost of the taxes. As a result, many builders have realized their investments go farther in the United States and are taking their business there instead.

The United States incentivizes reinvestment in housing

Another policy the United States has in place that encourages private-sector investment in housing is that it allows for deferral of capital gains on the sale of a business or investment property provided the proceeds are reinvested in similar property. This means if a company builds and sells a rental housing development, they can defer paying tax on the capital gains by investing the money into another rental housing development project. That alone is a significant incentive to build and reinvest in more housing.

What this means for Canadians

It’s critical to our economy that we have enough affordable housing. Given our declining birth rates and aging population, Canada needs to attract, develop and retain skilled workers to ensure our economy grows. If Canada can’t offer newcomers an affordable place to live, then businesses won’t be able to attract the world’s best talent and we won’t be competitive in the global economy. 

But we won’t make a dent in our housing supply needs if government doesn’t address the lack of investment incentives and work to keep Canadian businesses and capital in the country. 

What we need from government

Since its creation in 2023, the Canadian Chamber’s Housing and Development Strategy Council has been calling for the federal government to address the longstanding regional barriers that have prevented us from building the housing we need.

The government has listened. In the past year, it’s rolled out initiatives like the Housing Accelerator Fund and more recently the Canada Housing Infrastructure Fund. These initiatives distribute federal dollars to provincial and municipal governments as an incentive to rethink restrictions that have impeded, slowed or stalled the private sector from reaching its production potential, while also tackling the financial burden of housing-enabling infrastructure — like water systems — dropped on builders in the form of development cost charges.  

Government has proven that they can tackle the regional barriers that have prevented houses from being built. Now it’s time to shift some of that momentum to the financial barriers, because if we continue to try to tax, regulate, restrict and condition our way to affordability, we end up jeopardizing our prosperity and the standard of living of all Canadians. 

The housing sector has waited patiently as the government exhausted every other option to get homes built. What we need next from the government is to prioritize putting Canada on a level playing field with the United States and start inviting investment back into the country.

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