Is This What It'll Take to Solve the Housing Crisis?

I’ve written my fair share of articles focusing on Canada’s housing crisis. I’ve discussed the roles taxes, development fees, zoning restrictions, and expensive environmental policies have had on construction. And I’ve discussed the pressures ten years of out-of-control immigration placed on availability and affordability. I even took a look at ideas being kicked around internationally.

But I’ll be the first to admit that I haven’t identified any sure-thing, plug-and-play solutions. Solving just the supply problem or just the demand problem - or even both of them along with all those nasty government regulations and taxes - probably wouldn’t make all that much of a difference.

However, Toronto real estate analysis John Pasalis just published The Great Sell Off , a report on the state of housing in Canada. Since the report contains some ideas that I think bear amplifying, I thought I’d discuss them here.

Pasalis acknowledges that there are indeed significant supply-side problems like development fees and zoning restrictions. And there have also been significant demand-side issues, like our disastrous mass-immigration policies.

But addressing just those won’t solve our problem. And that, as Pasalis would have it, is largely because home ownership is no longer about a place to live and to store wealth for personal retirement. In Canada - more than most other countries - home ownership has also become a way to store wealth as an investment. Pasalis calls this the financialization of the housing market

Pasalis observes that real estate investors can outbid most Canadian families on single-family homes because they have easy access to low-cost capital and - critically - no pressing need to limit their spending to a low multiple of the median household income. That means there’s no effective market constraint on housing prices.

Not only do the business models used by investors depend on the steady increase in real estate market prices, but they also drive those increases. The growing disconnect between household income and housing prices over the past few decades gives us all proof we need:

So removing regulatory and capital constraints will never be enough because, to some degree, that would just add more fuel to the fire. But at the same time, it would be a disastrous mistake to legislate investors out of the market completely because that would undoubtedly cause far more harm than good.

The trick, as Pasalis sees it, involves carefully balancing government tax and housing policies. Besides reducing zoning restrictions and removing counter-productive policies, that would involve:

• Increasing down payment minimums for anyone who’s not a first-time home buyer from 20 percent to, say, 35 percent

• Lowering construction-related fees and land transfer taxes (likely in the form of a rebate) exclusively for construction that would be used for first-time home buyers

• Restricting existing preferential capital gains tax treatment to a smaller subset of owners in order to level the playing field between investors and residents.

Enforcing measures like those would not be impractical or even disruptive. But they would organically price investors out of many deals, carving out more space in the market for families.

Perhaps the most immediate impact of such policies would be on investors: where will they spend all that capital that was, until now, sunk deeply in real estate? Well, why not redirect it to actual innovation and industry? Those are, after all, traditional destinations for investment capital.

In fact, as Pasalis observes, Canada’s dismal labor productivity rates in relation to the U.S. and other countries aren’t because we’re lazy. To a large degree, they’re the product of the fact that we don’t produce anything of value anymore: too much of our wealth comes through the appreciating value of our real estate.

Now for the fun part.

Assuming a stable population and flat nominal prices (something that more or less reflects real world conditions over the past six months or so), I asked an AI model for a stylized, back-of-the-envelope scenario model (not a forecast) for the Toronto market. Think of it as: “If these levers are pulled and nothing else moves, what order of magnitude effects are plausible over 10 years?”

The result of the thought-experiment was a 15-20 percent reduction in home prices over ten years. But that’ll come with some moderate economic and political blow back. My AI was particularly (and deliciously) cynical about the ability of governments at all levels to stay the course and not quietly self-sabotage.

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Baseline setup (Year 0)

We need a simple reference household and home.

Assumptions

• Median household income (real): $100,000

• Median owner-occupied home price: $1,000,000

• Mortgage rate: 5% nominal, stable

• Amortization: 25 years

• Baseline down payment: 20%

• No real income growth

• No population growth

• No nominal price growth absent policy (prices flat)

Baseline affordability metrics

• Price-to-income ratio: 10.0×

• Mortgage principal: $800,000

• Annual mortgage payment: ≈ $56,000

• Payment-to-income ratio: 56% (clearly unaffordable by traditional standards)

This is intentionally “Toronto-like” but abstract.

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Policy lever 1

Raise minimum down payment for non-first-time buyers from 20% → 35%

Mechanism

• Reduces effective demand, especially leveraged investors and move-up buyers

• No population growth means lost buyers are not replaced

• In a flat-price environment, this creates persistent excess supply pressure

Quantitative assumption

Empirical literature on credit tightening suggests:

• Sales volumes fall sharply

• Prices drift downward slowly, not crash

Let’s assume:

• –0.75% price pressure per year, cumulative
  (very conservative — less than many macroprudential episodes)

10-year effect

1,000,000×(0.9925)10≈928,0001{,}000{,}000 \times (0.9925)^{10} \approx 928{,}0001,000,000×(0.9925)10≈928,000

📉 Price decline: –7.2%

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Policy lever 2

Rebating development charges & land transfer taxes for first-time-buyer construction

Mechanism

• Lowers per-unit cost of new entry-level homes

• Improves project feasibility at lower price points

• With stable population, new supply must displace prices elsewhere

Quantitative assumption

Let’s assume:

• Targeted policy increases effective supply of entry-level units by 1% of stock per year

• Not all of that translates into net new occupancy, so price impact is muted

Assume:

• –0.6% annual price pressure, compounding

10-year effect

928,000×(0.994)10≈873,000928{,}000 \times (0.994)^{10} \approx 873{,}000928,000×(0.994)10≈873,000

📉 Additional price decline: –6.0%

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Policy lever 3

Narrow preferential capital gains treatment for housing investors

Mechanism

• Reduces post-tax return on housing as an asset

• Encourages:

  • Fewer investor purchases

  • Some investor exits

• In a no-growth market, this shifts the demand curve left permanently

Quantitative assumption

Empirical estimates tend to show small but persistent effects.

Assume:

• –0.4% annual price pressure, compounding

10-year effect

873,000×(0.996)10≈839,000873{,}000 \times (0.996)^{10} \approx 839{,}000873,000×(0.996)10≈839,000

📉 Additional price decline: –3.9%

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Combined 10-year outcome (all three policies)

Home price

• Starting: $1,000,000

• Ending: ≈ $840,000

📉 Total nominal decline: ~16%

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What this does to affordability

New affordability metrics

• Price-to-income ratio:

  840,000/100,000=8.4×840{,}000 / 100{,}000 = 8.4×840,000/100,000=8.4×

• Mortgage (20% down):
  Principal = $672,000
  Annual payment ≈ $47,000

• Payment-to-income ratio:
  47% (still bad, but materially better)

If buyer is first-time (benefiting from policy #2)

Assume:

• Rebates reduce effective purchase price another 5%

• Net price ≈ $800,000

• Mortgage ≈ $640,000

• Annual payment ≈ $44,700

• Payment-to-income: 44.7%

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Why this result is actually large in policy terms

A 16% nominal price decline over a decade:

• Is not a crash

• Would barely register year-to-year

• But dramatically changes long-run affordability

Historically:

• Canadian housing policy typically moves prices by single-digit percentages

• Sustained multi-lever pressure like this is rare

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What this model is not capturing (important)

This is conservative because it ignores:

• Wage growth (would improve affordability further)

• Real interest rate declines

• Behavioral feedback loops (expectations shifting)

• Zoning reform multipliers

• Immigration-driven demand (explicitly excluded)

It also ignores:

• Political economy resistance

• Transition effects (e.g., short-term construction slowdown)

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Bottom line (plain English)

Under stable population and flat baseline prices, your three policies together plausibly produce:

• ~15–20% lower home prices over 10 years

• Meaningfully improved affordability, especially for first-time buyers

• No crash, no sudden shock — just sustained pressure

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What about economic and political fallout from such a policy shift? Here’s what my AI offered:

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1. Household balance-sheet stress (quiet but widespread)

What happens

• Existing owners see home equity stagnate or erode

• Recent buyers (last 3–5 years) experience paper losses

• “Move-up” households are hit hardest: they lose equity and face higher down-payment hurdles

Why this matters

Housing wealth in Canada functions as:

• Retirement security

• Consumption collateral

• Intergenerational transfer mechanism

A prolonged period of:

• Flat or falling prices

• Higher transaction frictions

→ leads to precautionary behaviour: less spending, fewer renovations, delayed retirement.

Scale of disruption

• Macro impact: mild but persistent drag on consumption (think tenths of a percent of GDP annually)

• Political impact: high — this hits middle-aged, voting-heavy homeowners

⚠️ Not a banking crisis — mortgages remain serviced — but a confidence shock.

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2. Transaction freeze & labour mobility problems

What happens

• Higher down-payment rules + lower price expectations → fewer transactions

• Capital gains changes reduce incentive to sell investment properties

• Owners become “locked in” waiting for better conditions

Consequences

• Labour mobility declines:

  • Harder to move for work

  • Regional mismatches worsen

• Family mobility suffers:

  • Downsizing delayed

  • Empty nesters stay put

• New supply competes poorly with resale stock in the short term

Why this is a big deal

Canada already has low housing turnover by OECD standards.
This policy mix pushes it lower.

📉 Lower turnover means:

• Less price discovery

• Fewer listings

• Paradoxically tight rental and ownership markets in some segments

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3. Construction sector whiplash (even with rebates)

What happens

Even with targeted incentives:

• Developers face lower expected exit prices

• Financing becomes harder (lenders price in slower appreciation)

• Marginal projects get shelved

Net effect

• High-end and speculative construction slows sharply

• Entry-level construction improves somewhat, but not enough to offset total decline

This creates:

• Employment volatility in construction trades

• Pressure on municipalities reliant on development charges

Political economy trap

Municipalities depend on:

• Development fees

• Land transfer taxes

Your policy explicitly reduces both — so cities may:

• Resist implementation

• Raise other fees or taxes to compensate

• Quietly restrict permits

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4. Rental market stress (counterintuitive but real)

What happens

• Investor demand drops (intended)

• Some small landlords exit

• New rental construction slows (unintended)

With stable population:

• Rental demand doesn’t explode

• But rental supply tightens unevenly

Consequence

• Rents may rise faster than prices fall, at least temporarily

• Politically explosive if not anticipated

This is one of the classic housing reform failure modes:

“We fixed ownership affordability and broke rentals.”

Mitigation usually requires:

• Parallel rental construction incentives

• Or rent stabilization policies (which have their own risks)

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5. Municipal fiscal stress

What happens

Over a decade:

• Land transfer tax revenues decline

• Development charge revenues fall

• Property tax base grows more slowly

Toronto is especially exposed.

Responses cities are likely to take

• Raise property tax rates

• Increase user fees

• Cut services

• Quietly obstruct new development approvals

This is not hypothetical — it’s a known municipal reflex.

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6. Political backlash & policy reversal risk

Who gets angry

• Recent buyers

• Small landlords

• Construction unions

• Municipal governments

• Boomers relying on housing wealth

How it manifests

• Media narratives of “destroying the middle class”

• Court challenges (especially around tax changes)

• Future governments rolling back or neutering the policies

This is the single biggest implementation risk.

Canada has a long history of:

• Announcing housing reforms

• Diluting them under pressure

• Quietly reversing them later

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7. Financial system stress (low probability, high salience)

Under your assumptions, this is unlikely, but worth flagging.

What would have to go wrong

• Interest rates rise sharply while prices fall

• Or unemployment spikes

• Or construction collapse feeds back into credit losses

Absent those:

• Canadian mortgages remain mostly full-recourse

• Loan-to-value ratios stay manageable

• Banks absorb it

This is not a 2008-style setup.

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