The federal government has announced considerable extra funding for housing in recent months: the GST rebate on construction of new rental units; the first beneficiaries of the $4-billion Housing Accelerator Fund; and additional low-cost financing through the Canada Mortgage and Housing Corp. (the CMHC).

These recent announcements constitute a switch in government strategy from ”demand-side” measures (such as support for first-time buyers) to ”supply-side” measures – a welcome development because the former have likely buoyed property prices without addressing underlying supply issues.

While there are still plenty of supply-side factors outside the federal government’s control – interest rates being chief among them – there are two issues that require federal attention: ensuring a genuine additional housing supply and encouraging provincial leadership in the field.

The need for “additionality”

Additionality (or “incrementality”) refers to the additional housing supply generated by new funding over and above what would have been built without the funding.

For government funding to be effective – and offer good value for money – it needs to deliver this additional housing and not just subsidize units that would have been built anyway. In the context of rising federal government spending, taxpayer value-for-money cannot be ignored.

The challenge for these new supply-side measures is that money isn’t the only constraint on housing supply. In particular, there are shortages in the construction labour force, as well as expensive regulatory barriers

The new federal incentives do not guarantee a genuine additional or substantial increase in the housing supply.

For example, both the GST rebate and the extra CMHC financing cover all new units constructed, not just those considered to be additional supply. While these initiatives could ease financial constraints for development, the risk is that the financial incentives aren’t specifically earmarked for additional units.

The Housing Accelerator Fund provides more incentives because it targets funding only for proposed additional housing.

Yet there are also risks with that approach. Because municipalities are tasked with projecting the hypothetical supply of new housing without funding, there is an incentive to “‘lowball” that number: the lower the hypothetical supply without funding, the greater the calculated additional supply, resulting in higher Housing Accelerator Fund contributions.

Ultimately, it is impossible to say precisely what the housing supply will be without Housing Accelerator Fund contributions and it will be a challenge for the CMHC to determine what is genuine additional supply. Several approaches can help with that.

Delivering additionality

First, the CMHC needs to scrutinize the hypothetical (without-funding) supply projections from municipalities before agreeing to provide Housing Accelerator Fund money. There should be strong evidence that money from the fund will generate additional housing over and above the basic supply.

Housing Accelerator Fund disbursements are currently running behind the original budgeted proposal. If political pressure mounts to release funding to municipalities, the CMHC must be vigilant to ensure value-for-money by delivering a genuine additional housing supply.

Second, under the terms for the fund, the CMHC will make staggered payments to municipalities contingent on those municipalities reporting progress in meeting additional supply. It would be detrimental for the CMHC to set too high a bar for reporting – because that might prove a disincentive to municipalities – but there must also be a credible threat that CHMC will withhold money in the case of under-delivery.

Third, additional housing supply can be encouraged through investment in other sectors. For example, in the U.S. the Department of Transportation gives higher scores in its transport grant funding assessments to jurisdictions with land-use policies that promote density.

One way to implement this in Canada would be for the Canada Infrastructure Bank to favour investments that directly or indirectly support housing supply. For example, the bank recently announced a $7.9-million loan for investment in water, electricity and broadband connections in Netmizaaggamig Nishnaabeg, a First Nation in Northern Ontario, intended to help provide the infrastructure needed for housing development.

The need for provincial leadership

Federal parties are increasingly seeking to demonstrate leadership on housing. The Liberal government has issued a raft of new policies (as noted above), while the Conservatives recently announced that reversing the current “housing hell” is a headline priority.

On the one hand, there is a good case for some federal engagement. Ottawa has greater spending power and holds some levers that influence the housing market, such as immigration.

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But ultimately, the provinces are constitutionally responsible for housing. As federal parties seek to assert control over how housing issues should be solved, that is crowding out the role of the provinces – at least in terms of political accountability – and possibly also in policy initiatives.

Of course, provinces are actively engaged in many ways. For example, in 2022, Ontario issued its housing supply action plan, and more recently announced measures to increase housing for homeless populations and to speed up planning approvals.

But crowding out is still a real risk. Political and public accountability creates strong incentives for governments to act, and the current federal strategies are inadvertently weakening provincial incentives by absorbing much of the political pressure. That must change.

Facilitating provincial leadership

First, the federal government needs to take a more balanced and consistent approach with its strategy and communications. Prime Minister Justin Trudeau recently appeared to “flip flop” around the federal role in housing – initially saying it was primarily a provincial responsibility, but then quickly announcing a series of significant policies.

Admittedly, the media’s coverage of the prime minister’s statements exaggerated the degree to which this appeared inconsistent. For example, he also stated that “it’s not just the federal government that can solve this” and that housing is an area that the federal government “can and must help with.”

Nonetheless, communications could be clearer. Ultimately, the federal government needs to remain committed to improving the housing situation but must leave ample space for the provinces to lead.

Second, Canada could learn from positive examples of intergovernmental collaboration from abroad. In Australia, a National Housing Accord was recently signed to “align for the first time the efforts of all levels of government, institutional investors and the construction sector to help tackle the nation’s housing problem.”

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Advancing a Team Canada approach to housing

In Canada, there is an intergovernmental housing forum. But whereas the Australian accord presents a detailed and specific action plan, including clear commitments for national and sub-national governments, the outcome of the most recent Canadian forum was largely vague, with only this statement issued: “Ministers agreed to work together to better align supportive housing and homelessness programs and explore further solutions.”

Third, for existing policies, the federal government should at least encourage provincial partnership. This is well underway for the GST rebate because the provinces have been encouraged to follow suit. However, the accelerator fund omits the provinces by design; its funds flow directly from the CMHC to municipalities. Provinces need to be kept in the loop to ensure housing actions are co-ordinated.

In Australia, a series of city deals have been struck where federal, state and municipal governments work together to jointly fund a range of infrastructure activities, including housing. In Canada, such three-layer intergovernmental collaboration would be extremely valuable, particularly in the context of how the accelerator fund money will flow.

Canada is in the throes of a housing crisis and it is no surprise that significant federal resources are being targeted to address this. But success requires genuine provincial leadership and the creation of housing that would not otherwise get built. As the political pressure mounts, cool heads are needed at the federal government to ensure that its schemes deliver value for money and avoid inadvertently crowding out provincial accountability.

The views expressed here are those of the author and do not necessarily represent the views of TELUS Communications.

This article is part of a series called How does Canada fix the housing crisis?

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David Jones
David Jones is a policy analyst and economist. He is a fellow at the Canadian Centre for Health Economics, a Telus research fellow and is studying public policy at the Munk School of Global Affairs and Public Policy, University of Toronto.

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