Max Fawcett: Tax home equity

Progressive parties have spent too long insisting that they won't tax home equity. Here's a thought: Maybe they should.

When it comes to suicidal political strategies, there might not be anything more obviously fatal than taxing the equity that people have in their homes. As an entire generation prepares for retirement that will be funded in whole or in part by extraordinary gains in house prices, that equity is one of the largest stores of untaxed wealth in this country.

People are, understandably, pretty touchy about the subject.

And yet, there has been much speculation lately that the federal government is planning to do exactly that. Last year, the Conservative Party of Canada circulated literature suggesting that the Liberals were planning to impose such a tax – though they were not. And last month, a story from an Ottawa-based news outlet called Blacklock’s Reporter breathed new life into the idea by reporting on a $250,000 grant awarded to Generation Squeeze, a Vancouver-based non-partisan organization that advocates on behalf of young Canadians, for the purpose of “researching a first-ever federal home equity tax credit.” Conservatives like Pierre Poilievre quickly jumped on this story as proof of the nefarious intent of the Liberals. 

A blanket tax on the equity that Canadians have in their homes is obviously not going to be a top priority for a government that recently appointed a “Minister of Middle Class Prosperity,” and whose re-election chances will be largely determined in places like Toronto’s 905 region.

But partisan puffery aside, perhaps we should be talking about a home equity tax. While the older generation may jealously guard the wealth accruing in their homes, the ones paying the price – figuratively and literally – are their children and grandchildren. For many Millennials, home ownership is an increasingly unrealistic dream. Generation Squeeze noted that it takes, on average, 13 years for first-time homebuyers to save enough money for a proper 20 per cent down payment, a figure that rises to 21 years in Toronto and almost 30 years in Vancouver. Those years spent saving are ones that they can’t use to pay down a mortgage or build the kind of equity that millions of older Canadians have managed to accrue. 

And even for those Millennials who do realize the dream of home ownership, it can often turn into a nightmare. The high cost of getting into the market today means that they spend far more of their incomes on shelter than their parents did. Yes, the average five-year mortgage rate topped out above 21 per cent in the early 1980s, but interest rates fell quickly from there — and have been falling for the last four decades. Today’s homebuyers are in the exact opposite situation, one where rates (and therefore financing costs) can only really go up. That exposure to higher rates is exacerbated by the fact that a growing percentage of new homebuyers are only able to put the bare minimum down, which effectively raises both their monthly costs and their exposure to any potential downturn in prices — the worst of both worlds, basically. 

That’s why it’s time to take the idea of a home equity tax seriously — one, say, that targets speculators and the ultra-wealthy while protecting the vast majority of Canadian homeowners. That seems far more palatable and politically viable, especially if the proceeds are used to invest in affordable housing and expanding access to it. What if, for example, the government implemented a capital gains tax on the sale of principal residences, but included a lifetime exemption of $500,000? That would protect the vast majority of Canadian homeowners from the tax while still discouraging speculation and capturing some of the surplus value that’s being created by overheated housing markets in places like Vancouver and Toronto. And what if those tax revenues were used in part to fund a new program that allowed young Canadians to borrow from their future selves, by deferring their first $100,000 in federal income taxes until retirement? These are the sort of ideas that we need to be discussing right now, as housing becomes ever more unaffordable and places an ever greater strain on the lives and pocketbooks of young families.

In its story, Blacklock’s noted that Generation Squeeze had “earlier likened homeowners to lottery winners,” as though that was proof of their nefarious intentions. But it’s hard to draw any other conclusion when houses routinely triple or quadruple in value and the homeowner doesn’t have to do anything other than live in it. In 2016, for example, the internet blew up when a famously run-down Point Grey home that a family had bought in 1983 for $141,000 got sold for $2.4 million. Like so many multi-million dollar Vancouver homes, this wasn’t one whose price reflected any sweat equity or curb appeal. Instead, its now-former owners were in the right place at the time. 

A tax on any profits from the sale of principal residences wouldn’t hurt new homeowners in major urban centres like Vancouver and Toronto, and it would barely touch ones in the rest of the country, whose markets haven’t appreciated nearly as much — and who therefore wouldn’t be sitting on anything close to $500,000 in paper profits. But it would ensure that the spoils created by overheated housing markets are shared more equitably than they are right now, and that marginalized groups like renters and young buyers don’t become collateral damage of speculative booms.

And for all the fearmongering being done right now around Generation Squeeze and its allegedly dangerous research, the reality is far more benign. Its objective, after all, is to “identify solutions that could level the playing field between renters and owners.” And as Co-Executive Director Eric Swanson argues, “We need to make it so that no Canadian relies on gains in housing wealth to feel secure, and we need to rethink the policies that – by encouraging the financialization of housing – push the cost to buy or rent a home even further out of reach.”

A tax on principal residences, subject to some major caveats and qualifications, could help reverse that trend. But right now, some Canadians seem more interested in politicizing that idea’s origins than assessing its merits.

*Clarification: For the purposes of this piece, equity means the market value of a home above what someone paid to buy it -- not the equity they've built through paying down a mortgage.

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