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The mortgage-interest deduction developers want would cost Ottawa $7 billion and miss the affordability target
The Canadian Home Builders' Association is pushing a tax change that would let buyers write off mortgage interest, but only on new builds. The pitch frames it as generational relief: millennials and Gen Z locked out by the stress test and 5% mortgage rates finally getting a foothold. The Parliamentary Budget Officer puts the revenue loss at $7.1 billion over five years. That figure assumes no behavioural response, which is optimistic. The actual cost could run higher.
The mechanics matter. Under current tax law, mortgage interest on your primary residence is not deductible. Investment properties get the deduction because the borrowed money produces taxable income. The CHBA wants to carve out an exception for new-build purchases, mirroring part of the U.S. system where mortgage interest has been deductible since 1913. In the U.S., the cap sits at $750,000 of mortgage debt. The Canadian proposal does not specify a cap, though one would likely appear in any serious draft legislation.
The argument from builders runs like this: high rates and the OSFI stress test, which adds 200 basis points to the contract rate or uses a 5.25% floor, whichever is higher, have erased roughly 30% of borrowing capacity since 2021. First-time buyers who qualified for $600,000 three years ago now qualify for $420,000. That gap shows up as unsold inventory in Toronto and Vancouver, where pre-construction condos sit waiting for enough deposits to break ground. Developers claim the tax break would restore monthly cash flow, pull sidelined buyers back into the market, and restart the housing starts Canada needs. CMHC estimates the country needs 3.5 million additional units by 2030 to restore affordability. Housing starts in early 2026 are running well below that pace.
Why the fiscal cost is structural
The $7 billion estimate is conservative because it assumes static behaviour. In practice, a mortgage-interest deduction changes what people can afford, which changes what they bid, which changes what developers charge. A household earning $120,000 with a $500,000 mortgage at 5% pays $25,000 in interest the first year. At a 30% marginal tax rate, the deduction saves them $7,500. That $7,500 does not stay in the buyer's pocket. It gets capitalized into the purchase price because every competing buyer has the same $7,500 in new firepower.
Research from the Federal Reserve and academic economists has shown that the mortgage-interest deduction primarily benefits sellers and lenders, not buyers. This is what happened in the United States: prices adjusted upward to absorb the tax benefit. The net effect on homeownership rates in the U.S. is approximately zero. The policy survives because it is politically entrenched.
The Canadian version would be narrower, new builds only, but the price mechanism is identical. If buyers of new homes can suddenly afford 8% more house, developers will raise base prices until the advantage disappears. The policy would transfer $7 billion from federal revenue to developer margins and leave first-time buyers no closer to ownership. It is a demand-side subsidy in a market where the bottleneck is supply-side: zoning, permits, serviced land, and construction timelines.
The regressivity problem
Tax deductions scale with income. A buyer in the 50% bracket saves twice as much per dollar of interest as a buyer in the 25% bracket. The mortgage-interest deduction would deliver the largest benefit to the households that need it least: high earners buying expensive new builds in major metros. A household buying a $1.2 million new condo in Toronto with a $960,000 mortgage saves $14,400 in year one if they are in the top bracket. A household buying a $450,000 townhouse in Kitchener with a $360,000 mortgage saves $4,500 at the 25% rate.
The math gets worse over time. The deduction is richest in the early years of the mortgage when interest is front-loaded. By year 15, most of the payment is principal and the tax benefit has shrunk. Wealthy buyers who can afford larger mortgages get the maximum benefit precisely when they need it least. First-time buyers with smaller mortgages and lower incomes get less, and they get it during the years when cash flow is already tightest.
Compare this to a direct supply subsidy. The federal government currently provides a 100% GST rebate on new purpose-built rental housing, a policy introduced in 2023 and active in 2026. That rebate flows to developers who are building rental supply. The fiscal cost is transparent, the incentive aligns with the bottleneck, and the policy does not create a tax preference that gets more valuable the more expensive your house is.
The cross-purpose problem
The Bank of Canada spent 2023 and 2024 raising rates to cool demand and bring inflation under control. Mortgage rates followed. The stress test is designed to ensure borrowers can withstand rate shocks and prevent systemic risk. A mortgage-interest deduction works directly against both. It boosts purchasing power, which increases demand, which puts upward pressure on prices. If the central bank is trying to cool the housing market and the federal government introduces a policy that heats it, the result is policy incoherence.
Developers would argue the deduction is targeted, new builds only, so it does not inflate the resale market. That distinction does not hold. New and resale homes are substitutes. A buyer with more purchasing power will bid more for either. The deduction pulls buyers away from resale and into new builds, but it also raises the ceiling on what everyone will pay. The deduction creates a real substitution effect because new and resale markets trade off each other, but this effect is not large enough to isolate the new-build market from broader price dynamics.
The inflationary risk runs deep. The U.S. mortgage-interest deduction has been cited by housing economists as one reason American home prices grew faster than incomes from 1950 to 2000. The deduction kept demand elevated even as rates fluctuated. Canada would be importing that mechanism during a period when affordability is already the central housing policy challenge.
What $7 billion could buy instead
Seven billion dollars over five years is $1.4 billion annually. CMHC's budget for the Housing Accelerator Fund, designed to streamline municipal approvals and unlock zoned land, runs roughly $4 billion total over the program's life. The entire National Housing Co-Investment Fund, which finances affordable and community housing projects, was allocated $13.2 billion over nine years. A mortgage-interest deduction would cost half of that in five years and produce zero new units.
Alternatively, $1.4 billion per year could fund direct construction subsidies for purpose-built rental housing, co-op housing expansions, or zoning-change grants for municipalities willing to allow new buildings near transit stops. Each of those paths increases supply. A tax deduction increases what buyers can bid but does not add a single housing unit to the market.
The CHBA would counter that the deduction gives developers the pre-sales they need to secure financing and break ground. The real constraint is the time and cost of navigating municipal approvals, the scarcity of serviced land, and the risk of holding inventory in a volatile rate environment. A tax break for buyers does not shorten permit reviews. It does not add developable land. It does not reduce the lender's risk on construction loans.
The proposal transfers federal revenue to developers through inflated prices while leaving the structural problems untouched. If Ottawa is looking for a $7 billion housing policy, this is not it.
The Canadian Home Builders' Association is pushing a tax change that would let buyers write off mortgage interest, but only on new builds. The pitch frames it as generational relief: millennials and Gen Z locked out by the stress test and 5% mortgage rates finally getting a foothold. The Parliamentary Budget Officer puts the revenue loss at $7.1 billion over five years. That figure assumes no behavioural response, which is optimistic. The actual cost could run higher.
The mechanics matter. Under current tax law, mortgage interest on your primary residence is not deductible. Investment properties get the deduction because the borrowed money produces taxable income. The CHBA wants to carve out an exception for new-build purchases, mirroring part of the U.S. system where mortgage interest has been deductible since 1913. In the U.S., the cap sits at $750,000 of mortgage debt. The Canadian proposal does not specify a cap, though one would likely appear in any serious draft legislation.
The argument from builders runs like this: high rates and the OSFI stress test, which adds 200 basis points to the contract rate or uses a 5.25% floor, whichever is higher, have erased roughly 30% of borrowing capacity since 2021. First-time buyers who qualified for $600,000 three years ago now qualify for $420,000. That gap shows up as unsold inventory in Toronto and Vancouver, where pre-construction condos sit waiting for enough deposits to break ground. Developers claim the tax break would restore monthly cash flow, pull sidelined buyers back into the market, and restart the housing starts Canada needs. CMHC estimates the country needs 3.5 million additional units by 2030 to restore affordability. Housing starts in early 2026 are running well below that pace.
Why the fiscal cost is structural
The $7 billion estimate is conservative because it assumes static behaviour. In practice, a mortgage-interest deduction changes what people can afford, which changes what they bid, which changes what developers charge. A household earning $120,000 with a $500,000 mortgage at 5% pays $25,000 in interest the first year. At a 30% marginal tax rate, the deduction saves them $7,500. That $7,500 does not stay in the buyer's pocket. It gets capitalized into the purchase price because every competing buyer has the same $7,500 in new firepower.
Research from the Federal Reserve and academic economists has shown that the mortgage-interest deduction primarily benefits sellers and lenders, not buyers. This is what happened in the United States: prices adjusted upward to absorb the tax benefit. The net effect on homeownership rates in the U.S. is approximately zero. The policy survives because it is politically entrenched.
The Canadian version would be narrower, new builds only, but the price mechanism is identical. If buyers of new homes can suddenly afford 8% more house, developers will raise base prices until the advantage disappears. The policy would transfer $7 billion from federal revenue to developer margins and leave first-time buyers no closer to ownership. It is a demand-side subsidy in a market where the bottleneck is supply-side: zoning, permits, serviced land, and construction timelines.
The regressivity problem
Tax deductions scale with income. A buyer in the 50% bracket saves twice as much per dollar of interest as a buyer in the 25% bracket. The mortgage-interest deduction would deliver the largest benefit to the households that need it least: high earners buying expensive new builds in major metros. A household buying a $1.2 million new condo in Toronto with a $960,000 mortgage saves $14,400 in year one if they are in the top bracket. A household buying a $450,000 townhouse in Kitchener with a $360,000 mortgage saves $4,500 at the 25% rate.
The math gets worse over time. The deduction is richest in the early years of the mortgage when interest is front-loaded. By year 15, most of the payment is principal and the tax benefit has shrunk. Wealthy buyers who can afford larger mortgages get the maximum benefit precisely when they need it least. First-time buyers with smaller mortgages and lower incomes get less, and they get it during the years when cash flow is already tightest.
Compare this to a direct supply subsidy. The federal government currently provides a 100% GST rebate on new purpose-built rental housing, a policy introduced in 2023 and active in 2026. That rebate flows to developers who are building rental supply. The fiscal cost is transparent, the incentive aligns with the bottleneck, and the policy does not create a tax preference that gets more valuable the more expensive your house is.
The cross-purpose problem
The Bank of Canada spent 2023 and 2024 raising rates to cool demand and bring inflation under control. Mortgage rates followed. The stress test is designed to ensure borrowers can withstand rate shocks and prevent systemic risk. A mortgage-interest deduction works directly against both. It boosts purchasing power, which increases demand, which puts upward pressure on prices. If the central bank is trying to cool the housing market and the federal government introduces a policy that heats it, the result is policy incoherence.
Developers would argue the deduction is targeted, new builds only, so it does not inflate the resale market. That distinction does not hold. New and resale homes are substitutes. A buyer with more purchasing power will bid more for either. The deduction pulls buyers away from resale and into new builds, but it also raises the ceiling on what everyone will pay. The deduction creates a real substitution effect because new and resale markets trade off each other, but this effect is not large enough to isolate the new-build market from broader price dynamics.
The inflationary risk runs deep. The U.S. mortgage-interest deduction has been cited by housing economists as one reason American home prices grew faster than incomes from 1950 to 2000. The deduction kept demand elevated even as rates fluctuated. Canada would be importing that mechanism during a period when affordability is already the central housing policy challenge.
What $7 billion could buy instead
Seven billion dollars over five years is $1.4 billion annually. CMHC's budget for the Housing Accelerator Fund, designed to streamline municipal approvals and unlock zoned land, runs roughly $4 billion total over the program's life. The entire National Housing Co-Investment Fund, which finances affordable and community housing projects, was allocated $13.2 billion over nine years. A mortgage-interest deduction would cost half of that in five years and produce zero new units.
Alternatively, $1.4 billion per year could fund direct construction subsidies for purpose-built rental housing, co-op housing expansions, or zoning-change grants for municipalities willing to allow new buildings near transit stops. Each of those paths increases supply. A tax deduction increases what buyers can bid but does not add a single housing unit to the market.
The CHBA would counter that the deduction gives developers the pre-sales they need to secure financing and break ground. The real constraint is the time and cost of navigating municipal approvals, the scarcity of serviced land, and the risk of holding inventory in a volatile rate environment. A tax break for buyers does not shorten permit reviews. It does not add developable land. It does not reduce the lender's risk on construction loans.
The proposal transfers federal revenue to developers through inflated prices while leaving the structural problems untouched. If Ottawa is looking for a $7 billion housing policy, this is not it.
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