Economists warn policymakers to ‘proceed cautiously’

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Analysts are warning policymakers to be prudent when considering any strategies meant to control the housing market.

“From a fiscal perspective, housing is something of a cash cow for Canadian governments,” National Bank economists Marc Pinsonneault and Warren Lovely wrote in their latest research note. “Our analysis would trace one sixth of Canada’s annual consolidated government revenue to the jobs, income, spending and property values ultimately spun off from the housing market.

“With so much at stake—economically and fiscally—policy makers would be wise to tread very careful. This is one cash cow you don’t want to tip over.”

The Canadian government earns just below $120 billion per year from the housing industry, according to the National Bank, which accounts for 17% of its revenue.

Part of that comes from land transfer taxes and, less directly income and consumption taxes, according to the economists.

“Along with land transfer taxes, sales taxes can be considered a high beta revenue stream as it relates to housing. It’s here where fallout from the weakening in consumer confidence and the more tentative spending patterns that attend a housing correction can wash up quick,” the economists wrote.

Housing-related jobs – such as those in finance and construction -- have also contributed to the overall economy.

“Here’s the bottom line: housing activity translates directly and indirectly to fiscal performance at all levels of government and in all corners of the country,” the pair wrote. “More to the point, the country’s heretofore robust housing market has churned out a mountain of revenue for Canadian governments—some more than others.

“Federally, housing-related income tax and GST proceeds cushioned the hit from collapsing activity in the oil patch,” they continued. “Take away housing’s significant economic-fiscal contribution and Ottawa would be wearing a considerably larger underlying deficit and would be facing calls for even greater fiscal stimulus.”

The pair concludes by arguing that a slowdown in the housing market could create a “fiscal drag.”

“As a public policy objective, ensuring housing remains affordable is a laudable goal and one we endorse,” Pinsonneault and Lovely wrote. “But with so much economic activity and government revenue being spun off from today’s housing market, policy makers (be it the Bank of Canada, financial regulators and/or federal, provincial, municipal governments) need to proceed cautiously and with a full understanding of what’s at stake.”
 

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