A rising real estate market puts a ‘tax me’ sign on every house in the country

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The housing market seems to be awakening, kind of like Godzilla does from time to time.

A disaster movie comparison is apt because resurgent housing is an alarming development. The only clear winners are people who sell homes and mortgages.

A quick run-through of the negative effects of a sudden housing revival:

• The Bank of Canada’s task of lowering interest rates gets a lot more complicated
• Young first-time home buyers would be pushed further out of the market
• Investors would be drawn back into the market
• Homeowner equity rises, which makes houses a more inviting tax target

The first three points are already happening, or on the verge. Over the next year, keep your eye on the tax angle. If real estate is where the money is in our economy, won’t that eventually be where taxation must go as well?

Expectations for the housing market this year were initially modest because of the weight of continuing high interest rates and a slowing economy. But the December resale numbers were surprisingly hot, and early reports for January show more of the same. “Canada’s housing market is on fire again,” Scotia Economics said in a note this week.

The resurgence of the housing market is tied to a decline in fixed-rate mortgage costs from peak levels, strong demand that isn’t being met with construction of new homes and a job market that is slowing but still producing wage gains ahead of inflation.

Hot housing sounds like a rare bit of good news in a world where so much bad stuff is happening. It suggests the economy isn’t as weak as we thought, and that homeowners are about to start getting richer again as they build equity.

But, Godzilla-like, a rampant housing market can create a lot of disruption. For example, economic inequality grows.

Food banks face record demand and tent cities are increasingly appearing, or growing in both urban areas and suburbs. A recent Maclean’s story cited a research estimate that more than 235,000 Canadians are unhoused. Meantime, we wait for strong home sales to start pushing up prices – oh, hang on, in Calgary the benchmark price is already up 10 per cent compared to a year ago.

Municipal governments across the country have already woken up to the idea of taxing homeowners to help pay for the rising cost of dealing with the housing crisis and other challenges. Toronto is talking about a 9.5-per-cent property tax hike, down from an earlier proposal of 10.5 per cent. Calgary and Vancouver are going with 7.8 per cent and 7.5 per cent, respectively, while Brandon, Man., is increasing theirs by 9.4 per cent and London, Ont., is looking at 8.6 per cent.

Rising home prices reinforce the idea that homeowners have wealth and are able to pay more in property taxes. This isn’t true in a practical sense because home equity can’t easily be tapped to pay for groceries or make the monthly payment on your SUV. But if there’s a single wealth dividing line in this country, it has to be home ownership. Rising prices just reinforce this idea.

The federal government has shown no interest in taxing capital gains on a principal residence, other than in cases where investors are flipping houses. But if services are going to be maintained or expanded in the future, then more tax revenue may be needed. The main choices: higher taxes on income, on purchases of goods and services or on real estate – the unsinkable asset that makes people richer while they sleep.

Meanwhile, each decision by a city to increase property taxes by well more than the inflation rate helps normalize the idea of homeowners paying up so municipal governments can provide needed services. Rising prices help with the optics of taxing homeowners, and with the accounting as well. When prices go up over time, so do the assessed home values used in property tax calculations.

Another slow-paced year for housing like 2023 would suit the country well. The Bank of Canada would have more room to lower rates without triggering a stampede into real estate, and first-time buyers would find a more hospitable market.

Unfortunately, the early data on housing suggests there will be no more calm for housing in the near term. Godzilla is loose again.

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