The government of Ontario has recently announced new policies intended to cool off its real estate market, imposing a 15 per cent tax on foreign home buyers like the one enacted in 2016 in British Columbia, and also extending its rent control regulations. In Montreal, the opposition is asking the city to follow the example set by these two provinces.
Thankfully, Quebec Finance Minister Carlos Leitão has said he’s not interested in interfering with the market, and with good reason: This is precisely the kind of policy that contributes to the problem.
Housing prices have been high in cities like Toronto and Vancouver since long before current worries about foreign buyers. In both places, zoning and land-use policies have been driving up real estate prices for more than 50 years.
Economists and urbanists are well aware of the effects of zoning, land-use, and smart-growth policies, which have all been shown to restrict the availability of housing. When these policies become too restrictive, housing prices skyrocket and the burden falls disproportionately on the poorest, with fewer affordable housing units being built in favour of more luxurious ones. This gentrification phenomenon has been happening in Toronto, Vancouver and Montreal for some time now.
As for rent control, imposing limits on rent increases helps some people, to be sure, but it makes rental units less profitable for owners. Consequently, fewer are constructed, thus leading to higher rents for many other renters.
Those who keep the same apartment for a long period of time can benefit from rent control, but for those who move into new apartments just being made available, prices are actually increasing faster than they otherwise would due to the artificially limited supply. Rent control thus actually exacerbates the underlying problem. As Swedish economist Assar Lindbeck put it, “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”
Although Montreal has had its share of misguided housing policies, its housing market is by no means comparable to that of Toronto or Vancouver. While it’s arguable that foreign buying has had an impact on prices in the Vancouver area, the evidence is far less conclusive in Toronto. In Montreal’s case, that scapegoat cannot even be invoked, as such purchases represent less than 1 per cent of transactions. At any rate, a tax on foreign buyers is not a solution to our bad public policies.
Montreal’s vacancy rate is also high and stable at 3.9 per cent, compared to Toronto’s 1.3 per cent and Vancouver’s 0.7 per cent. The year-over-year change in the price of a home reached 31.7 per cent in the Greater Toronto Area and 11.4 per cent in Greater Vancouver in April 2017. In the Greater Montreal Area, the corresponding figure was 3.7 per cent. If there’s a problem in Montreal, it’s the lack of investment in affordable housing which, again, is partly due to rent control.
Cities like Vancouver and Toronto would be expensive places to live even without misguided policies. Lots of people want to live in a big city, because these places tend to be economic juggernauts, full of opportunity. But yesterday’s distortionary policies have not only failed to address the matter; they have made things worse. Extending and expanding these measures will only pave the way for the same harmful consequences in the future.
Rather than letting artificially limited supply drive prices up and drive the poor away from cities, governments should allow the price mechanism to work, incentivizing developers to build more when prices go up. It would be better to target support for those who truly need it than to distort the market with well-intentioned but counterproductive measures.
Mathieu Bédard est économiste à l'Institut économique de Montréal et l'auteur de « Immobilier : le problème est le contrôle des loyers et non les acheteurs étrangers ». Il signe ce texte à titre personnel.