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The Trudeau government’s brazen dismissal of the will of the House of Commons, when it comes to sending political aides to testify before parliamentary committees, is deepening divisions between partisans.
“Why would anyone vote for the Liberals?” bemoaned one Conservative on social media, citing WE, SNC, rail blockades and vaccine missteps as evidence that hanging is too good for them.
Yet for the silent majority of non-partisans, there are compelling reasons why they don’t feel that it is time for a change in Ottawa. Principal among them is the wealth effect created by a six-figure increase in house prices in the past year.
There are 9.5 million households that own their own home in this country and they have enjoyed an unprecedented boost to their wealth during the pandemic. According to the Canadian Real Estate Association’s MLS house price index, prices increased by 17.3 per cent in the year to the end of February. The national average house price is now $678,000, a number which is heavily influenced by sales in Vancouver and Toronto. But even when those markets are excluded, the average price is still $528,000 and many smaller markets have seen even larger percentage gains than the big cities, as people have taken advantage of the pandemic to move to bigger homes in smaller markets.
The most counterintuitive boom in recent history has taken place against a backdrop of rising government transfers, declining real mortgage rates and a surge in savings.
The savings rate — the amount left after consumption is subtracted from disposable income — reached 14.8 per cent last year (from 1.4 per cent prior to the pandemic), in part because of the generous government income replacement schemes that saw many households receive thousands more dollars than they lost.
Disposable income for low-income earners rose by a third in the second quarter of last year, thanks to Ottawa.
The surge in net worth to an average of $786,000 per household contributed to a housing market that was already overheating because of lack of supply.
With a budget coming up later this month, the Liberals will be keen to ensure those gains are preserved. A research note by BMO on Tuesday said the government needs to break the belief that prices will rise inexorably, before the bubble bursts.
Some economists and journalists have advocated removing the exemption of capital gains tax on principal residences. The economic argument in favour is that the current policy costs taxpayers $7 billion a year and is an anomaly — capital gains on other asset classes like stocks are taxed (albeit at a rate of 50 per cent), so why not houses?
The economic argument against the move, is that it might make the problem worse by persuading people against selling and drying up supply still further. There is also a fairness consideration — Canadians have used their homes as a key asset in their financial planning and changing the tax rules without warning would throw off those plans.
In any case, a full removal of the exemption is a non-starter politically. A Bloomberg poll suggested 56 per cent of respondents would vote against any party that imposes a capital-gains tax on principal residences.
Chrystia Freeland, the finance minister, might consider a special capital gains tax aimed at stamping out speculation by introducing a rate that falls to zero after five years of ownership.
She may get away with that move, without the mob resorting to torches and pitchforks.
But her room for manoeuvres other than that is fairly limited.
The federal government has already tightened mortgage standards by introducing a stress test but the current qualification rate is well above market interest rates.
The long-term fix is to increase supply and CREA chief executive, Michael Bourque, has urged Ottawa to link infrastructure spending to housing shortages — for example, municipalities would qualify for funds for roads or transit, if they re-zone land to permit more housing to be built.
On the demand side, another policy that has short-term merit is the elimination of blind bidding, a process that has kept prices ballooning upward as frustrated would-be buyers have purchased for well over the asking price to secure their dream home in a tight market.
Protecting gains already made would be a good use of this budget but, given the timing before an election, it is likely to be more ambitious than that.
A report by the Parliamentary Budget Officer on Tuesday suggested that despite a budgetary deficit estimated at $363.4 billion this fiscal year (or 16.5 per cent of GDP), Canada can expect to see pre-pandemic levels of employment by the end of this year, thanks to galloping economic growth of 5.6 per cent.
Debt-to-GDP will likely reach 50 per cent, the highest in two decades, but should be sustainable because debt servicing costs are at the lowest levels ever recorded.
The greatest threat to recovery may well be a pre-election budget intent on spending billions of dollars on stimulus the economy may not need. The PBO said stimulus spending is a risk to its outlook, since labour markets are recovering nicely without it. “The size and timing of the $70-100 billion for stimulus may be mis-calibrated,” the PBO said. “If measures become permanent programs that are deficit financed, there is a risk the sustainable debt-to-GDP trajectory we predict over the medium and long-term would be reversed.”
The Liberals are presiding over an economy where there is already a feel-good effect among 9.5 million homeowners.
They do not need to give away another $100 billion of borrowed money just to ensure their majority at the next election.
Copyright Postmedia Network Inc., 2021