What Canada could learn from Australia about houses and taxes

Norway, Schnor’way.

Canadians in search of socio-economic nirvana often end up taking their cues from Norway and other Scandinavian countries who seem to have it all when it comes to combining strong social safety nets with economic growth and prosperity.

And let’s not knock Norway too much. There are lessons to be learned there, especially on the sovereign wealth fund front.

But right now, as Canadians struggle to find new ways to afford housing, we should be looking to Australia.

Australian legislators are in the midst of daring to do that thing that makes Canadian lawmakers balk: trying to change the tax system so that it encourages the building of new homes, improves affordability for first-time home buyers and confronts intergenerational inequity.

The new measures were the centrepiece of a disruptive budget rolled out earlier this month.

The reason Canada should pay attention is because Australia’s housing market looks a lot like ours right now.

Since 1999, the Australian budget notes, housing prices have risen more than twice as fast as average full-time earnings. Home ownership among people aged 25 to 34 fell seven percentage points between 2001 and 2021.

Australian legislator Gary Maas sees the pressures daily in his suburban riding near Melbourne. Immigration has been intense, prices of homes have soared and wages have not kept up, he says. But those with means have been buying property after property, using a complex system of high-leverage mortgages and tax write-offs.

“We have a bunch of people who are pissed off. They are angry. They’ve done everything they were supposed to do” to save and buy a home, Maas said in an interview during a work trip to Ottawa this week. “It doesn’t make sense.”

In Canada, home ownership among people aged 25 to 39 fell six percentage points between 2011 and 2021. And real house prices compared to disposable income per capita are about 50 per cent higher now than in 2007.

In Australia, policymakers have pointed their finger at their tax system and the way it encourages investors to buy up properties for rental or to build their portfolios, since they traced affordability issues for first-time home buyers to competition from investors.

The budget took aim at “negative gearing” — a measure that allows an investor to reduce their taxable income when rental properties cost more that they earn in rent. Now, previous purchases will be grandfathered, but in the future, negative gearing won’t be allowed on property purchases — unless they are new builds.

The budget also took aim at some of the ways capital gains tax applies to assets. Starting in July, Australia will no longer give a 50 per cent capital gains tax discount and instead replace it with a tax on inflation-related increases, coupled with a 30 per cent minimum tax on net capital gains.

At the same time, immigration is levelling off and the government is investing in affordable housing, Maas says.

Canada’s system is different, of course. We don’t have exactly that.

But we do have a complex system of tax measures that have been set up over the years by politicians hoping to curry favour with voters, be they existing homeowners or young people anxious about getting into the market for the first time.

As a result, we have a mish-mash of a system that costs the federal and provincial treasuries billions every year, fuels demand, favours the wealthy and distorts the housing market in many unintended ways while leaving only our affordability problems intact.

A recent study by the Canadian Tax Observatory tallied up tax expenditures at the federal level alone and found at least nine different incentives costing $17 billion in foregone revenue.

Canada, pushed by tax incentives, has seen an increasingly large amount of investment flowing into the real estate sector over the past 25 years, even as business investment has slumped.

And housing prices have climbed and climbed. Even with the recent slowdown, homes in Canada are really expensive — compared both to the past and to other countries.

In its budget, Australia has taken direct aim at property investors who are competing with first-time home buyers and driving up prices, undermining affordability. They have modelled the changes and foresee 75,000 additional first-time home buyers over the next decade, reversing the previous decade’s decline in home ownership rates.

We have parts of this problem in Canada too. Bank of Canada researchers found in 2022 that buyers of investment properties were taking on debt and exacerbating boom-bust cycles in the housing market because they’re much quicker to buy and sell than people who buy their homes to live in them.

The central bank has been tracking those patterns and finds that even with the current real-estate market softness, investors make up about 25 per cent of mortgaged home purchases.

Maas is convinced the new measures in Australia, combined with spending on transit and affordable housing, will deliver to make home ownership more affordable there.

For now, it’s an experiment in the form of projections in a budget document.

For Canada, it’s an experiment worth watching, even if it’s not Norway.