A shortened version of this piece appears as a letter in the March 25, 2019 edition of The Globe and Mail

One of the things Canadians need right now is negative pressure on the cost of housing. This can be achieved through any number of policies that increase available housing supply. Funding the construction of new co-operative housing, expanding the scope of public housing, and taxing second properties or vacant properties are all market-driven policy interventions which can be used to achieve the goal of applying negative pressure on the cost of housing within the existing market by increasing supply.

By comparison, the Liberal government has proposed, in their upcoming budget, a policy which will apply positive pressure to the cost of housing. It will sustain or increase prices in the market, possibly even inflating a housing price bubble. The Liberal plan involves using the CMHC, a crown corporation, to purchase up to 10% equity in homes purchased by first-time buyers. When these buyers sell their homes they would be required to pay back that amount (with or without interest or capital appreciation hasn’t been specified). By increasing the number of buyers who qualify for financing, this policy will increase housing demand and drive price growth. It will also expose the CMHC to additional risk by forcing them to bring an announced $1.25B on to their balance sheet which at some point could require a write down if housing prices fall.

A further questionable component of this policy is the successor. Some future government will declare the policy either unsustainable (defund it or allow the initial allocation to be depleted) or in need of expansion. Both options are fraught with peril. Should the policy be declared unsustainable a shock to the housing market would be realized in the sudden shrinking of the demand side. Should it be declared in need of expansion the price of housing would continue to rise, causing the CMHC to own an increasing amount of the (expensive) Canadian housing stock. This may seem analogous to the expansion of public housing which I mentioned earlier, but it isn’t. If public and co-operative housing were expanded the costs of the exercise would be at the control of the CMHC and economies of scale could be realized. In the Liberal policy, the already hot housing market determines the prices the CMHC has to pay for equity in the national housing stock.

The Liberal plan is a short-term solution which does long term damage. It doesn’t address the reason housing is expensive — lack of supply — and instead raises the prices for everyone. In doing so it will tie up an increasing amount of capital in housing and reduce the velocity of money throughout the economy.