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Taxation is the unused tool for dealing with the problem of unaffordable housing.

Boomers, you can relax. The capital gains tax exemption on principal residences is not up for discussion here. It’s taxation of investment properties that represents an opportunity to make home ownership affordable again.

The idea of using tax as a hammer comes from John Pasalis, president of Realosophy Realty Inc., a real estate brokerage that specializes in data analysis. Mr. Pasalis recently published a report titled The Great Sell Off: How Our Homes Became Someone Else’s Business. A two-word summary of the report: fresh thinking.

The political consensus today is that building more homes is the answer to the unaffordability that resulted when growth in home prices outpaced income gains in recent decades. Earlier this month, the new Liberal Housing Minister answered with a “no” when asked if housing prices should go down and then said the government needs to deliver more supply.

There are two ways to use taxation to cool demand for homes and thereby address affordability, the first being to remove the capital gains tax exemption on principal residences.

A Globe and Mail editorial published during the 2021 housing boom made a case for removing the tax break on homes, but politicians have never publicly engaged with this idea because of the guaranteed backlash.

The federal Underused Housing Tax targets foreign investors, as does the ban on foreigners buying residential property in Canada. Mr. Pasalis goes much further on investors by suggesting:

• a minimum down payment on investment properties of 35 per cent;
• taxing capital gains on properties as regular income;
• eliminating mortgage interest deductibility for investors.

Mr. Pasalis says house prices soared way above incomes over the past two decades because of investor buying, not a lack of residential construction. While millennials and Gen Zs were increasingly priced out of the market, investors kept buying.

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The new Liberal government has promised to build almost 500,000 new homes a year, but Mr. Pasalis doesn’t see this construction boom generating a serious improvement in affordability. “We’re probably going to see more of the same, which means effectively that our home ownership rate keeps declining over time,” he said.

Mr. Pasalis doesn’t believe that demand from traditional buyers is distorting the market, and he sees home ownership as an important step in building wealth that can be used as part of a retirement plan. Focusing on investors instead would start the process of deconstructing the concept of houses and condos as financial assets rather than shelter.

People who already own homes would not be directly affected under Mr. Pasalis’s plan, but a less frantic housing market would slow future price gains. His take on boomers is that they’re willing to give up some home equity gains if their children have an easier time affording a home.

“What boomers are experiencing is that they have a couple of options – either they have to go into debt to help their kids buy a home close to where they live, or they’re seeing their children leave their province to buy a home,” he said. “I don’t think either of those outcomes are ideal for the boomer generation.”

Mr. Pasalis’s report says after-inflation growth in house prices was higher in Canada than any other Group of Seven country between 1990 and 2024. The cost of the median-priced Toronto home went from 4.4 times median household income to 10 times income over 15 years. In 2022, investors owned more than one-third of homes in the Maritimes, and roughly 25 per cent of homes in Ontario, Manitoba and British Columbia.

For the minimum down payment applied to investment properties, Mr. Pasalis suggests an increase to 35 per cent from 20 per cent. Eliminating the tax-deductibility of mortgage interest on investment properties is a measure implemented in the U.K., he added.

Taxing investment gains on real estate as regular income would be a jarring change from the current 50 per cent inclusion rate on capital gains for all kinds of assets. Mr. Pasalis said the response so far to this latter proposal has been surprisingly positive, possibly because investor demand for housing has cooled in the past couple of years as a result of high interest rates and weak markets in some cities.

Bold as Mr. Pasalis’s ideas are, they will not improve affordability in a hurry. “Housing is a difficult problem to solve once home prices have gone so far out of reach,” he said. “It’s very easy to for home prices to go up 30 per cent in a single year. It’s very rare for them to fall 30 per cent.”

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