As discussed in part one, studying past housing policies can provide valuable insight into potential solutions for the current housing crisis. Canada’s significant change in approach to housing policy throughout the 1970s – another period when affordability concerns and rental market pressures captured public attention – offers particularly useful lessons. During this time, governments at all levels shifted from a more passive stance to actively intervening in the housing market.
Lessons from past tax reforms
The early 1970s saw tax changes that significantly affected the housing sector. Key among them were:
- introducing separate depreciation Classes for rental buildings, where any unclaimed capital costs are recaptured and treated as income for tax purposes if the property is sold (depreciation recapture)
- preventing real estate from being used as a tax shelter by prohibiting the use of real estate losses to offset other non-real estate income
- allowing the capitalization of carrying costs on undeveloped land – such as property taxes, general maintenance and mortgage interest – rather than treating these costs as regular operational expenses, and
- deeming half of the gains on real estate investments as realized (earned) upon the investor’s death
These changes significantly reduced the liquidity and after-tax yield of residential property investments, as well as the effectiveness of real estate investment for estate planning, by taxing capital gains and accumulated depreciation on the sale of a property.
Since capital gains taxation affected a broad range of assets, it did not distort real estate investment relative to other assets. The elimination of the tax shelter and depreciation recapture were much more significant. In late 1974, the government reversed its position on disallowing real estate as a tax shelter, permitting losses on new rentals. Nevertheless, the overall impact of these changes was to discourage private investment in rentals, as the reversal on tax shelters was short-lived, lasting only until the end of 1976.
The secondary impact of these tax changes was to tilt the concentration of ownership in rental properties to large corporations. The tax planning changes and the liquidity effect resulting from the changes, particularly through the recapture provisions, had a comparatively smaller influence on these larger corporations.
Finding missing investors for the missing middle
The $4 billion Housing Accelerator Fund (HAF) is a recent attempt by the government to encourage municipalities to deliver more housing. We have seen the Minister of Housing actively use the HAF to push municipal applicants to make changes in their development approval process. The changes have been highlighted in a roadmap published by CMHC.
At its core, there is a push towards:
- faster project approval through process improvements or pre-approved designs
- increased zoning density
- review of development charges and other fees
The underlying philosophy of the approach aligns with ‘missing middle’ development – medium-density housing somewhere between single-family residential properties and high-rise condominiums. This type of housing is greatly needed in Canada. The challenge is that this type of project does not align with large developers who either focus on large multifamily structures or greenfield developments – construction of new buildings on previously undeveloped land – which tend to be for industrial or commercial purposes rather than residential.
To stimulate missing middle development, the government must look at ways to encourage small investors – a discussion for next time.
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